Aug 18, 2014

Is Big Business in India thriving on Crony Capitalism?

Wikipedia defines Crony Capitalism as a "term describing an economy in which success in business depends on close relationship between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks and so forth. Crony capitalism is believed to arise when political cronyism spills in to the business world; self-servicing friendship and family ties between businessmen and the government influence the economy and society to the extent that it corrupts public-serving economic and political ideals." Why I thought of bringing this up is because I find a number of articles appearing in newspapers which actually are (if you read between the lines) trying to defend crony capitalism.

I was taken by surprise when Economic Times in an editorial What is wrong with Crony Capitalism ( Aug 13, 2014) concluded: "As India evolves and acquires institutional maturity, it is imperative to shed cronyism from the process of selecting those to accord State support. But it is too early to rid the system of State support altogether." A few days later Swaminathan Aiyar writing in the Times of India (Aug 17, 2014) under the caption: Corruption? protection rackets more than crony capitalism (http://bit.ly/1t9WuzZ) lists 30 riches families and gives them a certificate of not being a beneficiary of State monopolies. Accordingly, these richest barons are a product of competitive business practices.

These 30 richest families listed are: Mukesh Ambani (Reliance Industries Ltd); Azim Premji (Wipro); Sunil Mittal (Bharti Airtel); Dilip Shanghvi (Sun Pharma); Anil Aggarwal (Sterlite); Shiv Nadar (HCL); Anil Ambani (Reliance Power and Communications); Kumar Birla (Grasim); Uday Kotak (Kotak Bank); Choksi-Dani-Vakil (Asian Paints); Gautam Adani (Adani Enterprises); KP Singh (DLF); VC Burman (Dabur); Keshub Mahindra (Mahindra & Mahindra): Adi Godrej (Godrej Industries); DB Gupta (Lupin); Rahul Bajaj (Bajaj Auto); Brijmohan Munjal (Hero): Subhash Chandra (ZEE): Naveen Jindal (Jindal Steel and Power); Vijay Mallya (United Spirits); Sajjan Jindal (JSW Steel); YK Hamied (Cipla); Pankaj Patel (Cadila); Kalanithi Maran (SUN TV); VC Sehgal (Motherson Sumi); Reddy family (Dr Reddy’s Labs); BK Parekh (Pidilite): BM Bangur (Shree Cement); and Sudhir Mehta (Torrent).

Read through the list and I am sure you will be able to immediately find out how many of them have been and still remain a beneficiary of State largesse. In fact, some of them have been the beneficiary of 'crony socialism' accumulating wealth during that period, and subsequently strengthening business after the economy was thrown open in 1991. It doesn't therefore matter whether we live in a socialist era or a capitalist, big business knows how to thrive.

But what pains me is the dexterity with which some loud speakers for the free market economy (includes some big names from the economic fraternity) have gone to defend 'crony capitalism' against protectionism or 'crony socialism'. It's more or less like the advertisements we often see on TV: "Meri kameez teri kameez se zaida safed" (my shirt is whiter than yours). Just because economic liberalisation is generally accused to be leading to massive corruption by a handful of big businesses does not mean that you have to stoop so low to defend it by saying that it's better for the economy than protectionism. A crime is a crime, and it doesn't matter during whose regime it was committed. Similarly, a crook is a crook whether he was active during socialist era or is pro-actively exploiting the resources (both natural as well as financial) during the times of market economy.

This is contrary to what the Reserve Bank of India Governor Raghuram Rajan warned the other day. Delivering a lecture in Mumbai, Rajan said: "One of the greatest dangers to the developing countries is the middle income trap, where crony capitalism creates oligarchies that slows down growth. If the debate during elections is any pointer, this is a very real concern of the public in India today." (Crony capitalism is a big threat to countries like India, RBI chief Raghuram Rajan sayshttp://bit.ly/1rhPDIi). 

Whatever one might say, the fact remains big business thrives on State largesse. Whether it is in the form of natural resources like land, water, forests, minerals being made available to them at a throwaway price or tax concessions in one form or the other. The moment State withdraws the unwanted support, you'll hear the same bunch of economists who defend crony capitalism, raise the chorus of policy paralysis. The moment you hear the war cry policy paralysis just be sure big business is not getting a free ride. So when Tata's don't get land at a price that only seeks 0.1 per cent interest (for his Nano factory), or when Laxmi N Mittal doesn't get Rs 1250-crore loan from Punjab Government to invest in Bathinda refinery and that too at an interest of 0.1 per cent, which in other words means practically at zero interest, they cry hoarse. But tell me, isn't this a classic example of crony capitalism? Does this government grant and tax breaks not fall in the definition of crony capitalism?

The line between what is called incentive and what falls in the broader category of crony capitalism is very thin indeed. As the Times of India further writes: "The governor's warning against crony capitalism and oligarchies is a reiteration of his statements four days before the Lehman Brothers collapse in 2008. In a speech at the Bombay Chamber, Rajan had highlighted that India had the highest number of billionaires per trillion dollars of GDP after Russia. While excluding NR Narayana Murthy, Azim Premji, and Ratan Tata as 'deservedly respected', Rajan had said "three factors — land, natural resources, and government contracts or licenses — are the predominant sources of the wealth of our billionaires. And all of these factors come from the government."

Even the three that he had exempted -- NR Narayana Murthy, Azim Premji and Ratan Tata -- have been beneficiary of massive doles from the government. I have already talked of Ratan Tata's Nano car project to give you an idea, but the IT czars are no exception. The other day I read a news report wherein Punjab Govt had welcomes Infosys to set up a unit in Mohali. Very right, nothing wrong with it. But offering Infosys campus in Mohali 50 acres of land is nothing but crony capitalism. Why does Infosys need 50 acres?

Mohali campus is not the only example. A report in Live Mint tells us that Infosys has the largest number of hospitality rooms in the country. With roughly 15,000 rooms constructed, it beats Taj and Sheraton. (Infosys: India's biggest hospitality firm? http://bit.ly/1t9EasS). On top of it, IT sector does not pay any I-T tax. A sector which is slush with money is not paying taxes. That's the reason while the IT sector thrives merrily on tax payers money, the rising stocks has accumulated private wealth into the hands of a few of top honchos who manage the IT sector. Basically it is public money that creates more wealth for a few. This is a classic example of privatising the profits, and socialising the costs. Remove the tax exemptions, and make IT sector pay for the land resources and you'll see the stock value coming down.

Since 2004-05 the government has started clubbing the tax concessions that it provides every year under the head Revenue Foregone. These exemptions were given to boost industrial production, enhance exports, and to create employment. In the past 9 years, Rs 36.5 lakh crore has been given as tax exemptions. In 2014-15 Revenue Foregone is Rs 5.73 lakh crore which is more than the fiscal deficit. P Sainath has very lucidly brought out what could have been accomplished from the kind of tax sops given knowingly to India Inc (P Sainath on Corporate bail out. http://bit.ly/1nv4w6k). Accordingly, every day for the past 9 years, India inc has received tax concessions to the tune of Rs 1,100-crores.

Yes, State support is very important for any industry. But when it continues indefinitely, it crosses into the category of crony capitalism. Raghuram Rajan is very right when he says "three factors — land, natural resources, and government contracts or licenses — are the predominant sources of the wealth of our billionaires. And all of these factors come from the government." 

No wonder, the economic wealth of 56 families in India is equal to that of 600 million. 

1 comment:

Rakesh Mallick said...

IT is a fact that even NRN and Premji , Infosys and Wipro respectively have received lands from different state governments at below market rates. Theirs are for profit ventures, those facilities makes thousands of crores each year.