Crony India shining

Fresh from shaking up the business community with audits of Delhi’s power firms and an FIR against the country’s biggest industrialist (he who must not be named), Arvind Kejriwal addressed the Confederation of Indian Industries. He took many attendees by surprise.

“Dhanda to zaroori hai (business is essential),” said the Aam Aadmi Party leader, reminding all that he comes from a family of small-time businessmen. “If government gets into business, there is too much corruption,” continued the former bureaucrat who has sometimes been labelled a neo-nationaliser, “only the private sector can create jobs for India’s youth.” His problem, he said, was not with capitalism, but crony capitalism.

But how much of a crony country are we compared to others? Is our industry ready to change and embrace clean capitalism? What policy carrots-and-sticks does it need?

Where the rich are

While evaluating cronyism, a good question to ask is how much of the country’s wealth is owned by its richest people. And here, the numbers prove we are a country where too much is held by too few. And they are helped generously by government patronage. According to the Forbes rich list (2011), the 55 dollar-billionaires in India controlled over 17 per cent of its GDP; compare that to China, whose 115 billionaires controlled a mere 4 per cent. Among medium-sized economies, only in Russia (29 per cent) and Malaysia (20 per cent) did dollar-billionaires control more wealth than in India. Both Russia and Malaysia are known for large oligopolies, with cronies of political rulers controlling vast reserves of natural resources. India is in dubious company.

In the 2014 Forbes list, three Indians were richer than China’s richest man, though China’s economy is over four times larger. In 2013, India’s richest man was worth almost double of China’s richest man. This is a cause for worry, not a reason to rejoice at the brilliance of our billionaires.

“If a country is generating too many billionaires relative to the size of its economy, then it is off-balance,” wrote Ruchir Sharma, emerging markets head of Morgan Stanley, in his book Breakout Nations. “If a country’s average billionaire has amassed tens of billions, not merely billions, the lack of balance could lead to stagnation (of the economy).”

‘Enemies’ of capitalism

At the heart of capitalism is a constant churn of ideas and businesses, what the economist Joseph Schumpeter termed creative destruction. But disproportionately powerful crony billionaires collude with policymakers to marginalise the competition: this deters innovation, and hurts the creative destruction process. So, India’s crony billionaires are actually the biggest enemies of capitalism.

Imagine Facebook founder Mark Zuckerberg as a crony capitalist: he realises that WhatsApp is a competitor taking away much of his younger audience, and business. So, he colludes with powerful friends on Capitol Hill to tweak policy to ban instant messaging over smartphones. The reason given is “national security”. Instead of coughing up $19 billion to WhatsApp’s founders, as Zuckerberg did last month, he could have gotten away by paying $1 billion each to some of the Republicans and Democrats on the Hill.

But the fact that Zuckerberg had to write WhatsApp a fat cheque is incentive for other innovators to create products that threaten the big capitalist. Then, Zuckerberg gets caught in a game of whack-a-mole: every time a competitor comes up, he has to dole out big cash, or risk defeat. This keeps him in check; eventually one competitor holds out and creates a company bigger than Facebook. That, in effect, is the cycle of creative destruction: what is bad for the big capitalist is often good for the entire capitalist system.

If you track the rich lists of the US, China or European nations over a period of time, you will see a constant churn of names — newcomers entering and incumbents dropping out. In India, you will mostly see the same families over decades, occasionally disturbed by a new software billionaire.

So where is India going wrong in creating a clean capitalist system? Let’s start with the preamble to the Constitution: “We, the people of India, having solemnly resolved to constitute India into a sovereign socialist secular democratic republic…”

Stigma of doing business

If our leaders are serious about promoting clean capitalism, they can start by removing the word “socialist” from the preamble. Clinging to an economic system (if only on paper) that has failed the world over, we display a damaging hypocrisy and unwillingness to learn from mistakes.

Further, it is this socialist consensus at the time of independence that attached a stigma to doing business, gave birth to the vile license raj, embedded cronyism, prevented mass entrepreneurship and kept India a poor nation. The best brains moved to foreign shores, where they found a free market for their ideas.

We were left with the lees. As the socialist State licensed and harassed legitimate entrepreneurs, it was the unscrupulous cronies who thrived; over time they made lots of money, with which they bought social status and became role models. A vicious cycle of cronyism was created.

To promote clean capitalism, India has to embrace and celebrate capitalism with all its imperfections, rather than treating it as a necessary evil in a constitutionally socialist State.

One can argue that China is a communist State, but has taken to capitalism with aplomb. So why does India need a constitutional amendment? Because India is a democracy that derives its spirit from the Constitution; China derives its spirit from the consensus within the Party and the vision of its leaders. No Indian leader will ever have the overarching authority of Deng Xiaoping, whose vision turned around his country’s economic direction. A visionary Indian leader will still need constitutional backing.

Bankrolling politics

Beyond the Constitution, India’s competition laws need to be strengthened and implemented seriously. While The Competition Act of 2002 is a big improvement from earlier legislations, it took seven more years for it to come into force and replace the obsolete Monopolies and Restrictive Trade Practices Act.

Experts have pointed out that the new act still leaves too many legal ambiguities, thus favouring lawyers and large firms that can hire them. For example, a large firm or cartel may get away with abusing the competition laws if its lawyers can prove their client’s “contribution to the (sic) economic development”.

But the big story also lies in the seven-year delay before The Competition Act came into force: both the NDA and UPA governments went slow, unwilling to upset the big corporates that bankrolled their 2004 and 2009 election campaigns.

This brings us to the most crucial hurdle to clean capitalism in India: the crony financing of political parties, which is the backbone of corruption. Research by the Association for Democratic Reforms shows alarming opacity in funding: 75 per cent of party funds come from ‘unknown sources’, going by the Income Tax Return with the Election Commission.

The Congress and the BJP are the biggest offenders, with ₹3,000 crore between them totally unaccounted for. On this issue there is broad consensus among parties: they see themselves above scrutiny. They hide behind the 19th century argument that their donor base is too large, and the donations too small for them to maintain proper accounts.

Kejriwal’s party can rightfully claim the moral high ground on this issue: its crowd-sourced funding model has left the old school stunned. Going into the Lok Sabha elections, corrupt political funding is set to become Kejriwal’s big pitch to show that Congress and BJP are the same: Mukesh Ambani is the popular symbol he uses to create this equivalence.

At the election races

In the likely scenario that the Aam Aadmi Party wins a majority in Delhi, and causes some key upsets in the Lok Sabha elections, it will also create a stir in the boardrooms. AAP’s challenge will be to keep expanding without black money and not get co-opted into the “system”.

But is Indian business ready for the clean capitalism challenge? If politics threw up Aam Aadmi Party, does Indian business have its own insurgents ready to take on the old guard? From the lukewarm reception to Kejriwal’s speech, it seems they are still nervous of this new, unknown element over which they don’t have much control. Modi and the BJP are the safe, old school bet for India Inc. It’s busy filling the coffers of the potential winning horse, hoping for returns if he comes to power. Small wonder then, that corporates also joined political parties in demanding that funding remains opaque: they fear political vendetta if they backed the wrong horse.

But ultimately, it’s this myopic view of Indian corporates that holds them back from greatness. The corrupt, crony system dissuades good people from joining both politics and business: professions that create entry barriers for talented, honest individuals can only remain mediocre. By not taking up the clean capitalism challenge, by continuing to put its faith in the old school idea of mutual back-scratching with politicians, India Inc has only decided to wallow in its own mediocrity.

Capitalism’s image problem in India is compounded by the parsimony of its capitalists. India ranks 133 in the World Giving Index, even below Bangladesh (109) and Nepal (115). Private charity contributions as a percentage of GDP are only 0.4 per cent here, compared with 1.3 in the UK and 2.2 in the US. In 2011, corporate philanthropy was only $1.5 billion dollars in India according to Bain, though its 46 richest people had a net worth of $176 billion.

But there is hope yet: the 2012 Bain report showed that younger high-net-worth Indians, especially those below the age of 30, stand out in their commitment to ‘give back’. Education is the most favoured cause, followed by food and shelter. There’s reason to believe India’s next generation of capitalists and billionaires will be of a better stock: they will be more involved in causes and demand cleaner systems for political donations, even if the current crop are happy with the status quo.

(The writer is a journalist, Fulbright scholar and media entrepreneur)

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