Harish Damodaran

Crony capitalism? Really?

HARISH DAMODARAN | Updated on November 24, 2017

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The term may not lend itself to understanding the evolution of Indian business

The term ‘crony capitalism’ has gained currency to the point where it is bandied about freely and even become the basis for some lazy theorising. I understand it as basically referring to a system where success in business is defined by one’s proximity to people in power or being part of ‘thick’ exclusive social networks.

This, as opposed to ‘clean capitalism’ that celebrates the idea of the individual risk-taking, innovative and hardworking entrepreneur. The successful businessman here isn’t someone who grabs licences or lands contracts by virtue of having the right connections, but the guy who comes out with a new or better mousetrap.

‘Build a better mousetrap’ is, indeed, symbolic of the American entrepreneurial spirit and the power of innovation. (It has more than metaphorical relevance; mousetraps have been the most frequently invented device in US history, with over 4,400 patents awarded. )

Fat cat theories

I have no objection to either ‘crony’ or ‘clean’ capitalism per se, despite their rather limited utility from a historical or even analytical standpoint (on that, later). My problem really is with using these terms for constructing grand theories of how capitalism in India, Russia or Indonesia is essentially ‘crony’, leading to businesses being cornered by a narrow oligarchy whose composition remains recognisably the same over time.

I don’t know much about the others, but to reduce the story of Indian capitalism to one based on rent-seeking and stifling of competition is nothing short of vacuous generalisation.

Take especially the contention that crony capitalism has resulted in there being no churn in the names of industrialists at the top. It is believed that business in India is dominated by the same set of families over decades, occasionally disturbed by a new software or pharma billionaire.

Not the same cats

One way to test this hypothesis is to see how many of the top 50 Indian business houses of today belonged to the Big-50 club, say in 1964 (50 years ago) or 1990 (the year immediately preceding liberalisation). Thankfully, we have the list for the latter two years from Gita Piramal (‘Big business and entrepreneurship’, Seminar, August 2003).

From my list of the current Big-50, there are only 11 names — Tata, Birla, Thapar, Sahu Jain (Bennett Coleman), Singhania, Goenka, Amalgamations, Bajaj, TVS, Mahindra and Wadia — who were also present in 1964.

What is the extent of churn after 1990? Well, today’s Big-50 list and the one for 1990 have just 17 common names. This includes the earlier 10 (11 minus Amalgamations) plus another seven who were not that big, if not non-existent, in 1964 (Ambani, Mallya, Essar, Godrej, Raunaq Singh/Apollo, Murugappa and Mappillai/MRF).

Further, among today’s top 10 business names, there are only three (Tata, Ambani and Birla) who were in the Big-10 list of 1990. The remaining seven include two figuring in the Big-50 list of 1990 (Essar and Mahindra), but five (Vedanta, Jindal, Adani, Bharti and Infosys) who were insignificant or non-existent in the pre-reform era.

If 33 of the top 50 conglomerates now weren’t part of this league even 20 years ago, it represents a reasonable amount of churn at the top.

And the ones contributing to this aren’t simply the odd software/pharma tycoons (Infosys, Wipro, HCL, Dr Reddy’s, Sun Pharma), but also those straddling other industries, whether infrastructure (Jaypee, GMR, GVK, Lanco, Torrent), auto ancillaries/forging (Motherson Sumi, Kalyani) and textiles (Alok) or finance (Kotak, Shriram), media (Maran, Essel/Chandra) and retail (Biyani).

The churn would be even more in the middle and lower capitalist rungs — a process that has gone hand in hand with an expansion in the social base of Indian business.

Social churn

Entrepreneurship in the country is no longer the exclusive preserve of a few Bania/Vaishya communities. Since Independence, capitalists have been recruited from diverse community backgrounds — including agricultural, scribal and other castes with little pedigree in trade or finance. This again defies the stereotype of a stagnant and self-perpetuating business elite.

True, most of these new capitalists may not have designed new mousetraps. Also, many of them would have emerged or grown by leveraging community connections. In that sense, you might well call it ‘cronyism’.

But the mistake is in assuming this to be synonymous with stagnation.

The Indian business landscape, on the contrary, has been quite amenable to the entry of new players, including regional capitalists who have found it expedient to invest in provincial parties and politicians to further their interests.

Such intermeshing of business interests and politics in a competitive democracy has led to frequent shuffling of the ranks of ‘crony capitalists’. Every party/politician has a chosen set of businessmen for bestowing favours and receiving funding in turn. To that extent, it translates into a capitalism fairly dynamic, even if ‘crony’.

Clean versus crony

That brings us to the question of ‘clean capitalism’: How real is this thing?

By ‘clean’, the obvious reference is to the firms in Silicon Valley. The promoters of Cisco, Google, YouTube, Facebook or WhatsApp were all people who became billionaires purely on the strength of their ideas — for which they got seed funding from Sequoia Capital, Accel Partners and other such venture capitalists.

These firms very much fit the picture of success in business derived from building products better than anyone had heretofore introduced into the market. In other words, clean mousetrap capitalism without any manipulation of policy or lining politicians’ pockets.

But this kind of capitalism is probably an exception than a rule even in Western economies.

While a Sergey Brin or Mark Zuckerberg may well conform to romantic notions of the innovating entrepreneur, there is nothing wholly ‘clean’ about Western corporations engaged in businesses such as oil & gas, retail, finance, pharma, commodities trading, defence equipment or engineering and construction. The record of some of them in influencing policymaking, extending to even triggering regime change or outright invasion of sovereign nations, is very well documented.

While crony capitalism could be a reality, the point really is about avoiding sweeping generalisations or viewing it as a uniquely emerging economy problem. Likewise, we need to recognise the limits of its canonised cousin: clean capitalism.

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Published on March 18, 2014
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