Calcutta Notebook
B J

The Government is ex pected to interfere in the working of the market in favour of competition in a ‘true capitalist system’. It must prevent cartels and promote competition. Economic Advisor to the Finance Ministry Raghuram Rajan has shown that the growth of civil aviation industry in the United States came because the Government intervened proactively in favour of smaller players. Result was that the mighty PanAm came to its knees and air fares declined and new age of cheap air travel was ushered in. The Government should not intervene in favour of a particular person or group. Rules should be applied equally to all. The permission to import a particular item or to grow a particular type of hybrid seed or to buy spectrum or coal blocks should be available equally to all players. This ensures that best among them wins and, in the process, the economy is not held up by inefficiencies of a particular group.

Crony capitalism arises when the government begins to intervene in favour of a particular group such the allotment of land, spectrum or coal blocks without giving others an equal chance. This leads to inefficient use of these resources by the favoured party. BSNL is a case in point. The shoddy telephone services led to huge loss to the economy.

Government intervention in favour of particular persons in appointments produces a similar result. Every applicant gets an equal opportunity in a true democratic set up. In contrast, appointments are made in favour of particular persons in a crony capitalist system. For example, Sanjay Gandhi determined certain policies in the yesteryears simply because of his position-with disastrous results for the country as well as his party. There is an interesting event described in the Ramayana. King Bharata undertakes certain major construction works after Rama leaves for the forests. These, it seems, prove to be disastrous. Ayodhya soon became empty. Such ill-fated policies are implemented because equal opportunity is not given to talented persons. Favouritism in appointments has an especially negative effect on human capital. Students focus more on 'carrying the bag' of the teacher instead of undertaking their studies. Knowledge is not created and the economy loses the potential gains that could have come from their education.

Worst form of crony capitalism comes to the fore when state power is used to smother those exposing cronyism. Indira Gandhi banned the RSS, appointed the Kudal Commission to launch a witch hunt against the Gandhians and launched many cases against the Express Group. In recent times the actions against Balkrishan of the Ramdev movement for allegedly fudging papers; and against Kiran Bedi for misuse of travel funds smack of cronyism.

Logical result of crony capitalism is reduction in the growth rate. Inefficient production by favoured parties continues unabated. India wasted billions by using fuel-inefficient Ambassador and Premier cars for more than two decades after fuel-efficient technologies were available because the government created barriers to the entry of new players. Same was the case with the telephone services under BSNL. Such inefficiencies lead to increased cost of production and bring down the growth rate.

Another consequence is that growth gets limited to a crony sector. One can see few persons moving in SUVs with armed guards these days. They have no shortage of money while the common man cannot; often, even afford a bicycle. The crony sector captures the natural resources and money capital leaving the rest to languish.

Crony capitalism also leads to migration of the talented persons from the country. Laboratory facilities and consultancy opportunities are apportioned on the basis of closeness to the powers-that-be. The talented migrate as they are unable to find suitable environment at home. The strength of the United States lies in substantial measure in attracting talented persons. They create new technologies for American companies who export these at monopolistic prices to suck out wealth from India and other developing countries.

Fortunately such crony capitalism does not last long. The family of President Ben Ali of Tunisia had captured all the major business opportunities in that country such as telecom and real estate development. It is here that the Arab Spring started. Indian businessmen had supported Mahatma Gandhi against the British because they found that opportunities were captured by the cronies of the English Government.

Frontier
Vol. 45, No. 32, February 17-23, 2013

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