In India, why is crony capitalism a big evil? (Part II) AAP has made the evil of crony capitalism an election issue. We need to dig into facts and decide for ourselves on this dimension. Let us not fall for manipulation that does not advance our understanding on this dimension. Crony Capitalism is modern India’s big evil. This is a private-public evil that harms development of our country - entrepreneurs, infrastructure development and allocation of capital. How does it impact allocation of capital? I quote from the article ( firstbiz/corporate/rajans-hidden-memo-crony-capitalism-under-upa-has-worsened-48298.html ) below: Raghuram Rajan (RBI Governor) issued his first annual Financial Stability Report (FSR) on Dec 30, 2013. It shows the extent to which crony capitalism has increased to become a major fault line in the banking sector over the last 5 years. It says that if one major corporate group were to default 100% on its banking loans, 60% of Indias entire banking capital would be wiped out. If one major corporate group were to default 60% on its banking loans, 50% of Indias entire banking capital would be wiped out. These are scary large numbers. Should we not talk about this as an independent dimension? Surely, the creation of “too big to fail was not a side-effect of development? Another tell-tale sign of Crony Capitalism is the vulnerability of sectors that typically need huge amounts of capital and friendly tweaks in government policies to make money. These are typically infrastructure, heavy and basic industries, mining, and aviation, among others. Guess what the FSR says? Five sectors, namely, infrastructure, iron and steel, textiles, aviation and mining together contribute 24 percent of total advances of SCBs (scheduled commercial banks), and account for around 53 percent of their total stressed advances. In short, they got 1 in 4 of bank loans, but account for 1 in 2 of its bad loan problems. And guess which group gives the stock market more heart-burn? Crony Capitalists know the stock market will recognize them as inefficient and stop funding them. So they pledge their shares to the banks (to us) at mark-to-a-good-market. How do Crony Capitalists prevent development? Crony Capitalists take measures to ensure that they get bigger slices of the pie, rather than growing the pie. When publicly owned coal mines, land and telecoms spectrum are handed to tycoons on favorable terms, the public suffers. A few capitalists receive these largesse without competition from efficient mid-size firms. And the crony capitalists consume a lot of capital, waste a lot of time and produce mediocre output. When crony capitalists collude with policy makers, there is no incentive for innovation and efficiency. The pie does not grow fast, the crony capitalists keep consuming bigger slices of the pie. How bad is Crony Capitalism in India? According to the Economist, Russia is the worst. US (rank 17) and even China (rank 19) are on the good side. India is ranked 9 (6 last year). One metric ( thehindubusinessline/features/blink/crony-india-shining/article5781037.ece ) is how much of the country’s wealth is owned by its richest people. According to the Forbes rich list (2011), the 55 billionaires in India control over 17% of our GDP. China’s 115 billionaires control 4%. Only Russia and Malaysia are worse than us. They are called Oligopolies. We in India do not talk of crony capitalism - so we dont call ourselves an oligopoly. Is this accumulation of wealth by 55 families a reason to rejoice at the brilliance of our billionaires, or a reason to frown why we have not given a lot more entrepreneurs the market condition to excel? We should transition from Socialism to Capitalism, not Crony Capitalism.
Posted on: Tue, 25 Mar 2014 15:55:45 +0000
Trending Topics
Recently Viewed Topics
© 2015