Crony Capitalism, Socialism or Corruption?

Introduction

George Santayana said, "Those who cannot remember the past are condemned to repeat it" Having forgotten the “Crony Socialism” of the “License Permit Quota (LPQ) Raj” that enveloped us from 1950 to 1980, many Intellectuals, Media and Politicians[i]  have apparently discovered a ‘new’ phenomenon called  “Crony Capitalism.” The LPQ raj consisted of stifling controls imposed on prices, production, capacity, investment, imports and exports, capital markets, banking and finance, land labor and natural resources.  This provided ample opportunities for collusion between corrupt government (politicians and bureaucrats, which was initially used to generate money to run parties and fight elections, but gradually and progressively became a means of generating personal income and wealth. Controls on pricing, production, investment and foreign trade in manufactured goods were reduced in the 1980s and lifted in 1990s. There was also a reduction in controls on banking and finance and some simplification of taxes.  This reduced the scope for corruption in the reformed areas.

Controls still remain in other sectors, of which the most important from the current perspective are government ownership of and/or control of land (land use), minerals, energy (coal & oil) and infrastructure. With acceleration in the growth of demand for natural resources, generated by the faster growth of the economy, rents inhering in these “natural resources” have risen, providing greater incentive for corruption.  This is particularly so for natural resources in which global prices have shot up (oil, coal, iron ore) and for non-tradable goods & services (urban land, electricity, transport networks) in which the demand- supply gap has widened.  Rising growth rates have similarly raised the rents implicit in public monopolies and the returns to and incentive for corruption by those who control these monopolies. 

History: Socialism

As documented by Thakurta(2003), “Long before Dhirubhai entered the industrial scene, Indian politicians were known to curry favour with businessmen – licences and permits would be farmed out in return for handsome donations during election campaigns. Indira Gandhi returned to power in the 1980 general elections and Dhirubhai shared a platform with the then PM at a victory rally. He had also become very close to the then finance minister Pranab Mukherjee, not to mention the PM’s principal aide R.K. Dhawan”.  “In 1981 the Indian Express exposed Maharashtra Chief Minister, Abdul Rehman Antulay, for allegedly extorting millions of dollars from businesses dependent on state resources and put the money in a private trust named after Indira Gandhi. The story led to his resignation (Wikipedia).[ii]  ‘The Indian Express detailed a host of ways in which the government had gone out of its way to assist the Ambanis (Thakurta).[iii]  ‘In 1987 a customs show-cause notice issued to Reliance Industries concluded that: "Reliance appears to have unauthorizedly imported four additional spinning machines...in a clandestine manner and without payment of customs duty on these machines." The four machines are valued at Rs.53.02 crore and the total customs duty demand is for Rs.119.64 crore” (Ninan).[iv]  No industrialist in India could dare to undertake such activity in the heydays of Indian socialism, without making ‘campaign contributions’ to cronies in the self labelled “socialist” Government.

Corruption

                A paper presented at the RGICS, New Delhi, in 2002, argued that the, “Government’s power to do harm has increased, while its power to do good has reduced.” It detailed through examples and experiences how pervasive and systemic corruption had become at all levels of the India’s Governments.[v]   Systemic corruption has been on a worsening trend over four decades. The CWG scam was exceptional only in that so much money was spent in such a short time to produce such shoddy work under the nose of, and visible to, the National media. It was merely a tip of the corruption iceberg that imposes a cut of 1/5^th to ½ on all payments for goods & services purchased by Central & State Govts, DPEs and PSUs from suppliers.[vi] The 2G scam was in contrast an example of the use of government policy controls over resources to create and extract rents.   A 2002 EPW paper on telecom policyr had argued that the only way to determine the correct market price for the spectrum over any geographical area was through competitive auctions.[vii]  Such auctions would allow any “natural resource rents” inhering in the spectrum to be captured by government. This argument was subsequently made in the TRAI (2005-6).  The 2G scam would have been much more difficult if these policy recommendations had been adopted / approved by the Government. “Coalgate” is similarly facilitated by legal monopoly over coal mines coupled with failure to auction this natural resource to determine the market price of coal blocks given to private parties.  The manipulation of policy, rules or procedures by the political masters to extract rents, obviously requires business partners (cronies) who will share the “resource rents” with the minister. But this has nothing to do with, ”crony capitalism” and everything to do with “corruption”- Individual and Systemic.

    Further, corruption is not just financial. It is also about law makers and law enforcers knowingly violating the law, protecting those who have broken the law and even rewarding them for serving political or personal objectives.[viii]  In 2003, RBI revoked the license of the Pratibha Mahila Sahakari Bank, on the basis of an inspection report that stated, “Pratibha Patil is the founder member of the bank, who is a politically influential personality. She has made all her relatives as directors of the bank and the bank is being run as good as a family business. Because of the influence of respondent no 8 (Prathiba Patil) the bank has given various loans to the relatives and to a sugar factory of which she is a director.”   “Her relatives have not paid back the loans. Most of the loans were given without security. Most of the loans are closed”[ix] Mrs Patil, a lifelong congress women, whose brother G N Patil was accused in a murder case, was alleged by journalist A Shourie to have obstructed justice in this murder case.[x] In 2007 she was nominated by the UPA for the post of President of India.

New Issues

A new type of opportunity for financial corruption in public contracting has arisen because of the introduction of PPP contracts.  Given the limited experience (both Indian and International) in Public Private Partnerships(PPP) in ‘natural monopoly’ segments of infrastructure, initial PPP contracts had flaws that could have created subsequent opportunities for collusion with corrupt government ministers and bureaucrats.  There is now sufficient experience of PPP in infrastructure, to modify these contracts and to build corrective mechanisms into them. Another known failure is the absence of strong, independent professional regulatory systems.  Ministers who treat regulatory appointments as sinecures for favored officials need to be exposed as (non-monetary) corruption.

Conclusion

Words like “Crony Capitalism” are ideological labels that hide more than they reveal. They are likely to lead the debate into esoteric discussions of capitalism and socialism and detract from finding and addressing the real problems.  The real problem is the unprecedented and incomparable system of government controls built under the Indian version of Socialism. This has resulted in pervasive and deep rooted corruption. We need policy reforms that reduce the incentive for corruption and institutional reforms that catch, try and punish the corrupt.[xi]

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A version of this article appeared in The Hindu, on April 9^th , 2014, under the title “Crony Capitalism or Plain Corruption,” http://m.thehindu.com/opinion/op-ed/crony-capitalism-or-plain-corruption/article5888056.ece/?secid=3010

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[i] Much of our intelligentsia consists of left intellectuals educated in Humanities and “soft” social sciences, who espouse Marxian economic (which is mostly sociology disguised as economics) and leftist economics devoid of quantitative/empirical elements.

[ii] http://en.wikipedia.org/wiki/Arun_Shourie

[iii] Paranjoy Guha Thakurta, http://www.india-seminar.com/2003/521/521%20paranjoy%20guha%20thakurta.htm

[iv] T N Ninan, http://indiatoday.intoday.in/story/custom-duty-evasion-by-reliance-may-land-ambanis-in-trouble/1/336798.html

[v] Arvind Virmani, “A New Development Paradigm: Employment, Entitlement and Empowerment,” Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. This paper was simultaneously published in a global journal and reproduced in four different books (compendium of articles).

[vi] Chintan®: https://sites.google.com/site/chintan1997reg/institutional-reform/governance-corruption

[vii] Arvind Virmani, “A Communication Policy for the 21st Century”, Economic and Political Weekly, Volume XXXV, No. 23, June 3-9, 2000, pp. 1907-1910. See also, “Competitive Access to Telecom: Spectrum Policy and M&A”, Economic and Political Weekly, Vol. XXXIX No. 7, February 14-20, 2004.

[viii] Receiving free private medical, legal or HR services, absenting oneself from work on a regular/organized basis (eg govt schools, health centers) or not doing the job one is hired for are also forms of corruption, now barely considered as corruption.

[ix]  Wikepedia: : http://en.wikipedia.org/wiki/Pratibha_Mahila_Sahakari_Bank

[x] Wikepedia: http://en.wikipedia.org/wiki/Arun_Shourie

[xi] https://sites.google.com/site/chintan1997reg/institutional-reform/governance-corruption Chintan®

Tentative Rollback of License-Permit-Quota (LPQ) Raj: Indira 2-Rajiv

Introduction

     An earlier article, "Nehru-Indira Socialist Economics Failed," showed that the welfare of the average Indian declined relative to that of the average citizen of the world between 1950 and 1980.  Towards the end of the 1970s a number of analysts began to realize that the Socialist ideological – Statist - Bureaucratic approach to economic policy was leaving India further behind the dynamic developing countries.  The Janata Party was in the forefront of efforts to reverse the most egregious features of this regime, but it could not change much because of political instability within its ranks. Mrs. Indira Gandhi had three years, post 1977 election defeat to hear newly emboldened critics of her economic policy failures.  When she returned to Power in January 1980, she started reversing some of the most oppressive controls she had instituted, controls never seen before or since in a non-communist country. The rollback of the LPQ raj was continued by Rajiv Gandhi, who succeeded her on her death in 1984. V P Singh became PM after the 1989 elections and Chander Shekhar who succeeded him, were more like book ends to this phase of Economic development, given the political turmoil and dissensions unleashed by them. The roll back of the Nehru-Indira1 LPQ raj by Indira2–Rajiv resulted in an acceleration of the rate of growth of India’s per capita rate GDP during 1980 to 1991 and began the Welfare catch-up of India with the rest of the World.

 Welfare Catch-Up

     The World Data Indicators, the standard series of data for World economy has data on Per capita GDP at purchasing power parity from 1980.  It is therefore the preferred source for comparing Welfare relative to the rest of the World from 1980 onwards.  According to this source India’s per capita GDP at PPP was 0.15 of world average in 1980 and had increased to 0.18 of the World average by 1991. In other words the Welfare of the average Indian, improved by 19.3% relative to that of the average World inhabitant between 1980 and 1991.  17.2% points or 9/10^th of this improvement came during the Indira 2- Rajiv regime.

   The average per capita growth rate of GDP in India during 1980 to 1991 was 3.0% per annum compared to an average per capita growth rate of 1.1% per annum for the World.  Thus India’s per capita GDP grew an average 1.9% faster than the World economy during this period.  This was almost a complete reversal of the relative per capita growth rates in the previous two decades.  Though the average Indian was still pathetically poor relative to the average world inhabitant in 1991, the process of “welfare catch-up” with the rest of the World had finally begun.

Tentative Change

   At the end of the 1970s every aspect of production, pricing, investment, import and export was controlled by the Central Government. In the 1980s only the most glaring distortions were corrected. The scope for diversification (production of related items) and expansion of capacity for the industries under investment licensing (up to 25% above licensed from 0) was expanded. The definition of small-scale industry (SSI) was raised by increasing the size limit (value of output/sales) abd 40 industries de-reserved. The cement and aluminum industries, and others with assets below 5 (15) crore de-licensed in in 1985(1988) subject to conditions. The limit below which MRTP clearance was not required for investment by “laege industrial houses” was gradually raised to Rs. 100 crore. There was virtually no reform in other production sectors such as mining and agriculture.

   Imports of capital goods were made procedurally easier through licensing of imports for modernization and export industries. Intermediate imports were gradually moved from licensing to tariff protection and made available for export production at lower duty.   Tax rates declined slowly from the absurd highs they had reached in 1970s e.g. 100% marginal rate on income from assets, inclusive of wealth tax) and modified value-added tax (MODVAT) credit was introduced into the excise tax.

The control regime, however, continued to be extended in exchange management and import tariffs continued to rise.  The fiscal deficit also expanded from around 6% in the early 1980s to 9% in 1991 while the revenue surplus became a deficit of 4% over the same period. This was one of the reasons for the Balance of Payments crisis in 1990-1991 that concluded this phase of economic development. By 1991-92 the share of the Public sector in total GDP had risen to 25.9% from 22.1% in 1979-80. The public sector share of Gross Capital Formation was still high at 38.4% of total [Virmani (2004)].[i]    Leaving aside small scale sectors like Agriculture, Trade, Hotels and Restaurants and unregistered manufacturing the presence of Government was much higher.  Government thus still controlled the commanding heights of the economy besides retaining much of the institutional structure of the stifling LPQ Raj

Conclusion

      The LPQ raj started to change during 1980s and its enforcement slackened due to deterioration in governance.  Though individual policy reforms were incremental (‘tinkeization’), remaining controls and restrictions started to be evaded thus resulting in greater de-facto de-control.  They were also politically credible signals of the intent to reform failed policies. This had an impact on the investment environment leading to more private investment and a shift from building of structures towards machinery and equipment. The opening of the economy to capital goods imports reduced their relative price and magnified the impact on investment efficiency. An increase in the fiscal deficit, stimulated government consumption and raised production in the presence of an output gap.  Consequently the massive gap between the welfare of the average Indian and that of the average World citizen began to close for the first time in modern Indian history.

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[i] Arvind Virmani, “India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth,” Working Paper No. 122, ICRIER, February 2004. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233 and

Arvind Virmani, “Sources of India’s Economic Growth: Trends in Total Factor Productivity,” Working Paper No. 131, ICRIER, May 2004. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233.