Crony Capitalism

Presented by
Anton Boban Thengummoottil
Deepak Venugopal
Prajna Sruthismara
What is Cronyism?
The basic definition of cronyism is the preferential treatment shown to
old friends and associates, without regard to their qualifications (Khatri &
Tsang, 2003)
One of the most common definitions of corruption is the use of public
office for private gain (Caiden, 2001, Larmour & Grabosky, 2001; White,
2001)
Cronyism is thinly distinct from Corruption
Unlike corruption, cronyism is based on trust, loyalty, friendship,
relationship etc.
What is Crony Capitalism?
Crony Capitalism applies to businesses and firms in a nation and society
Holocombe (2012) characterizes crony capitalism as a system in which the profitability
of a business depends on political connections
An economy in which success in business depends on close relationships between
the businessmen and government officials. It may be exhibited by favouritism in the
distribution of legal permits, government grants or special tax breaks etc
Crony capitalism results when those in political power use it to their advantage by
providing profit opportunities to individuals who invest in political lobbying,
campaigning, and relationships
The term however is used interchangeably with corporate welfare to the extent
that there is a difference, it may be the extent to which a government action can be
said to benefit individuals rather than entire industries.
Features of crony capitalism
Corruption
Bribe to government officials
Tax evasion
Government favours business owners with closer ties. This may be racial,
religious or ethnic.
In Indian context
The liberalisation process, initiated since 1991, was clearly a crisisdriven
change. It shows how the breaking down of crony systems is initiated.
It has involved the retreat of the State from attempts to direct the course of
the economy, the dismantling of the entire structure of discretionary
controls associated with, and the grant of greater freedom to the operation
of market forces.
The liberalization process has encompassed the financial sector as well as
the external sector, with the loosening of controls on trade and capital flows,
both direct and portfolio.
But Crony capitalism still appears to be pervasive in India and underlies the
acts of corruption.
A brief journey into the past of
Indian Capitalism
Colonialism and Cronyism
The beginnings of Indias capitalist experience can be traced back to the
arrival in India of European mercantile companies, the most important
eventually being the British East India company (the Company).
The grant of the royal charter to the Company by Queen Victoria in 1600
giving it a monopoly over the India trade can be called the first act of
cronyism of relevance to India.
This monopoly was subsequently deepened in the 18th century by the
gradual displacement of other European mercantile companies and the
process of the territorial conquest of India.
Conquest converted the Company into government, the most extreme form
of state capture possible, and which led to even the utilization of surplus
revenue for the commercial activity of purchase of Indian goods for export
to England and Europe.
The abolition of the Companys monopoly over the trade with India in
1813 was a result of the rise of new interests in Britain, the industrial
capitalist class which was interested in accessing the Indian market.
British crown supported European businessmen than native businessmen.
Cronyism during Post Independence
With the transfer of power, Indian capitalism entered a new phase and this
was accompanied by shifts in the alignment of patronage towards Indian
businesses to a much greater extent than earlier.
The strategy of importsubstituting industrialization and planned
economic development that the Indian State adopted soon after
independence was one that broadly had the concurrence of Indian business.
Private capital too had a place in the planned process of expansion, but
that meant that the State or State agencies remained important in the
allocation of expansion opportunities between private enterprises through a
system involving industrial and import licensing, foreign collaboration
approvals, capital issues controls, etc.
Curbing the concentration of economic power required its own specific
intervention.
Abolition of managing agencies.
Nationalization of major commercial banks.
Nationalization of general insurance and core sectors.
Foreign Exchange Regulation Act
Aftereffect of policies
Finding of loopholes in laws by private firms.
Public sector dominance.
Grant of industrial license, which is an automatic guarantee for private
sectors.
Underutilization and Overutilization of licenses.
Big business houses taking incentives and grants which were actually
meant for encouraging small industries.
Liberalization and Cronyism
Liberalization refers to relaxation of government restrictions, usually in
areas of social, political and economic policy
Cronyism during liberalization:
Tax exemption for foreign as well as domestic investors.
Privatization and FDI
Leading to corruption of public officials.
International transactions as a new dimension for graft.
Competition for investment.
Impact on tax rates and revenue structure(as the corporate tax increased
from 10% to 30%).
Liberalization structurally increased social power of big business or
concentration of the economic power.
Paid up capital of non government agencies exceeded that of government
counterparts.
Crony Capitalism: Big threat to India
?
Crony capitalism slows down economic growth by killing transparency and
competition.
Provision of public goods may get biased against access to poor.
Middle income gap may widen more.
Present Day...
Nira Radia Tapes Dayanidhi Maran
Coal Gate 1.86 Lakh Crores
2G Spectrum 1.76 Lakh Crores
Suspension of CMD of Syndicate bank because he raised the credit limit for some favoured
corporate houses
Late Pramod Mahajan Reliance nexus
Bofors Scandal Rs 640 million paid as kickbacks
S Kumars Reid & Tailor Rs 1758 Crores
Ispat Alloys - Rs 1359 Crores
PSU Banks wrote off Rs 34409 Cr. Of bad debts in the financial year 2013-14 (Indian Express, 06-12-
2014)
DLF land dealing approx.Rs 65 crores
Rajdeep Sardesais tweet on 15-02-2013 Irony: When law min in dock, no UPA minister there
to defend him. When Vadra in dock, cabinet ministers lined up to defend
UB Group Rs 2673 Crores ( Vijay Malya was a member, consultative committee in ministry of
Civil Aviation)
Conclusion
Globalized finance and a narrow spectrum of large and established
businesses have exercised influence on and also benefited from the
decisionmaking process of the State.
The empirical evidence presented clearly shows that under liberalization
the main actors and drivers of changes, in the private corporate sector and
in different individual industries, have been existing domestic and foreign
large firms and incumbent firmsthat is firms with a past historyrather
than new entrepreneurs.
Private capital, both domestic and foreign, and both industrial and financial,
has also succeeded during this period in imposing to a greater extent its writ
on the development process of the Indian economy, to the exclusion of other
segments of Indian society.
Thank You