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®

Poor need Mobile Payments and Banking

   The Government, RBI and many Banks seem to be confuse  “Mobile Banking” with “Mobile Access” to ones Bank Account. The latter requires one to have a pre-existing bank account in a specific bank branch. In the old days, one had to physically go to this bank branch to deposit or withdraw money or to deposit a check. One could and still can issue a check in another person’s name which she can physically deposit in her bank account.  “Mobile Access” (internet access) makes it possible for the account holder to use a mobile phone (internet connection) to check bank balances, transfer funds between different accounts in the same bank (eg saving, checking, credit card) and from ones accounts to another person with an account in the same bank.  Where a system of “Bank correspondents” exists one can use the services of a correspondent who visits you to deposit cash or check or withdraw cash from your account through a physical transfer to/from him cum a digital transaction through his  mobile/ internet  connection to the correspondent’s account at the bank.

    True “Mobile Banking” is an entirely different animal altogether. It is like a super charged prepaid mobile card in which the balance in your pre-paid card acts effectively as a “mobile wallet” from which you can make and receive payments from any other mobile phone. As it stands, anyone can pay cash to charge the pre-paid card of any other person’s mobile phone.  However, the outstanding balance on the pre-paid card cannot be withdrawn or used for any other purpose than making phone calls. A “mobile payments system” would allow everyone to use the balance on her mobile pre-paid to make payments to any other person’s mobile for purchase of any good or service.  Mobile companies have the accounting and software systems to quickly and cheaply convert everyone’s mobile phone into such a mobile wallet and thus create a "Mobile payments system". In fact with sufficient competition they may (if allowed) even start offering a small interest rate on your outstanding balance or offer limited credit facilities for a fee and thus convert it into a true “mobile banking” system.  RBI regulations on “payments systems” and banking however, forbid cell phone companies from offering any such payments or banking services.

The idea took root when I first read about how South African government had started using mobile phones to deliver pensions to retired government servants in rural and remote areas of the country.  A mobile payments and money transfer service called “MPesa” was launched by SafariCom in Kenya in 2007. Since then I have a strongly argued for allowing true “mobile banking” with clear upper limits on deposit & credit balances and transaction amounts, coupled with less stringent/costly regulations. At that time less than 50% of Indian’s had bank accounts, though the percentage has inched up towards 60% (according to official sources, a NGO survey puts it at less than 47%). Most of those without access are either the urban poor, intimidated by the banking system, or the rural poor & middle class who do not have the time, or find it too costly, to access bank services. In contrast an estimated 80% of Indian’s already own mobile phones and the coverage is projected to approach 100% within the next 5 years.  Thus the quickest and cheapest way to make modern payments and banking systems available to the poor and lower middle class, is by allowing true “mobile payments and banking” services.

The stability of a country’s “payments systems,” and “banking system” are critically important to the health of the “financial system” and the modern economy. The RBI therefore has stringent regulations on all payments and credit intermediaries and particularly on banks through which most of these activities take place.  The RBI however has traditionally insisted that any other financial intermediary that undertakes these transactions must meet the same regulatory standards.  One has argued that, the by limiting the set of transactions to a small set of well understood and transparent one and by putting absolute values (for e.g. maximum balances of Rs 10,000 and aggregate transaction of Rs. 50,000/annum and credit to the average daily balance) one can limit the systemic risk allowing a reduction in regulatory requirements such as capital adequacy norms, SLR, CRR etc).

Even within the current system, RBIs regulations were much more stringent than in neighboring Pakistan.  With the result that, use of mobiles for internet transactions has spread much more quickly than in India. It is hoped by many analysts and observers, that the highly unsatisfactory state of affairs, will be corrected through implementation of the relevant recommendations of the Nachiket More committee on inclusive banking. At best this will give the poor a "mobile payment" systems. We will still however be some way from true, “Mobile Banking.”

India Vision 2020: Growth and Welfare

Introduction

   Elections are a few months away and the election battle has been joined.  Parties are formulating their manifestos and trying to refine a vision that they can present to the voters.  It is therefore timely for those of us with a national (as against party) perspective and some knowledge and experience of economic development, growth and governance, to put forward our views for the consideration of the contending parties.  In the first of a series of notes, we start by putting the critical importance of economic growth to people’s Welfare in historical perspective.

Social Welfare

History

 The welfare of the average Indian was about the same as the welfare of the average inhabitant of the World at the peak of the Pala (Northern) and Chola (Southern) empires (1000-1200). This was followed by a period of invasion, wars and political consolidation (Sultanate, Mughals), during which the real income of the average Indian fell to 80% of the average World inhabitant by 1820. The gap between the welfare of the average Indian and the World widened dramatically during colonial rule, reducing the average Indian to pathetic poverty by the time of Independence.  In 1950 the real income of the average Indian (per capita GDP at PPP) was reduced to a quarter (1/4^th) of that of the average inhabitant of the World. The British colonialists ensured through a combination of neglect and design, that the industrial revolution did not revolutionize India’s economy.  The fruits of the industrial revolution, which originated in Great Britain and propelled it to global super-power in 19^th century, were denied to India.[i]

Socialist Decline

      The gap continued to widen during the first 30 years of Independence, to reach its widest point of 85 per cent points in 1980.  During this period economic policy was driven by the ‘Indian version of socialism,’ sometimes incompletely referred to as “Fabian” or “Nehruvian Socialism”, as Shrimati Indira Gandhi contributed to its negative development from 1966 to 1977. This misplaced approach continued the Indian people’s descent into abject poverty, to 14.5% of World average.  In 1980s Mrs. Indira Gandhi abandoned her failed policies, accelerating India’s per capita income growth above the World average and began to close the Welfare gap.

Reforms and Catch UP

   The economic reforms and liberalization of the Indian economy, first in the 1980s and then further in the 1990s, has had unambiguous benefits for the Indian people.  The welfare of the average Indian had increased to about a third (1/3^rd) of that of the average World inhabitant by 2010.  The rate at which the welfare gap has been closing has accelerated over this period (1980 to 2010), with the rate of catch up during the 2000s being about three times that during the eighties.  The highest average 10 year growth rate of per capita GDP at PPP was 6.2% in decade 2002 to 2011. These facts contradict assertions based on selective use of comparator countries and time periods. However, this acceleration had within it the seeds of its own hubris. Because of widespread growth complacency and consequent mismanagement, growth collapsed in 2011 and the welfare gap has started widening again. Unless the new government formed after the election, takes decisive corrective action, the gap may continue to widen in 2014.

Social Indicators

It is very important to understand that it is this gap between our per capita GDP (at PPP) and the World, that, (a) categorizes us as a (relatively) poor country, (b) results in our having much greater ratios of poor and near-poor people than other countries, and (c) Is the primary cause of the gap between our social welfare indicators and those of better off countries. In 2012, Vietnam with a per capita GDP at PPP of 30% of the World average was two ranks below India at 32% while Pakistan with 24% of World average is 8 ranks below.  On the upper side are Philippines (37%), Indonesia (42%) and Sri Lanka (52%), still poor, but with their “Aam Admi” much better-off than ours.

Conclusion: Objective

The fundamental objective of any Indian government must be to close the welfare gap of the Indian people with the rest of the World, in the shortest possible time.  This objective is inseparable from the objective of sustaining fast growth. What is a realistic target to aim for by 2020-2025?  The next Indian government should aim to raise the per capita GDP level of India to 43% of global average by 2020 and 54% by 2025 (from 32% today). This will require a restoration of per capita growth to 6.5% within three years and a sustaining of this growth rate till 2025. This will generate economic opportunities and jobs for youth and begin to restore the welfare and dignity of the average Indian to the level of the average World inhabitant.  We will explore other elements of the broad vision in subsequent articles.

[i] Arvind Virmani, "Fall and Rise of India", Working paper No. WsWp 1/2013, October 2013 at https://sites.google.com/site/drarvindvirmani/growth or https://sites.google.com/site/drarvindvirmani/working-papers

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A version of this note appeared under the same title at:

http://blogs.economictimes.indiatimes.com/PolicyAnalysis/entry/india-vision-2020-growth-and-welfare.