Crony capitalism alive and well

India Inc complains loudly and often about the derailment of reforms. But it may be the villain of the piece.

Last week, to the obvious dismay of the government, global credit ratings major Standard & Poor’s declined to enhance India’s credit rating. Slower than expected reforms meant that growth will not pick up to the levels seen earlier in the decade, the agency concluded. Without growth, the government’s other problems — a burgeoning deficit and a widening trade gap — are unlikely to go away anytime soon, which is why the ratings agency also maintained its ‘negative’ outlook on India.

The government was understandably miffed, since the rating coincided with an overseas tour by the Finance Minister, undertaken for the express purpose of drumming up more investment into India.

Outcomes vs intentions

Why did S&P do what it did, even though, as the government has pointed out repeatedly, reforms are continuing, FDI has been opened up in a range of sectors from aviation to retail, and it has announced its roadmap to cut the deficit?

Well, S&P did what it did, because it, like any other dispassionate observer, looks at outcomes rather than intentions. Has the government managed to materially cut the deficit? Not quite. Has it managed to trim its expenditure in a significant way? No. On the contrary, a combative government is readying to push through, via a special session of Parliament, or even an ordinance if necessary, an ill thought-through and hugely expensive law on food security, estimated to cost the government anything from Rs 50,000 to 80,000 crore a year. Money it doesn’t have, since its Budget is already in the red.

Ditto on reforms. Yes, FDI has been ‘thrown open’ in a host of sectors. Does that mean that overseas investors now face no hurdles in setting up shop, since, at a policy level, all roadblocks have been cleared? The answer, once again, is no. In fact, even the two success stories of foreign investment thanks to its recent reform measures — IKEA and AirAsia — are stuck in a welter of red tape, as a host of ‘clearances’ stand in the way of their actually starting to do business in India.

The story is no different when it comes to infrastructure. In fact, as S&P pointed out in its ratings review, “Despite the initiatives from the Cabinet Committee on Investments to cut red tape on infrastructure and power projects, the committee’s success in raising investment growth remains uncertain.”

Why is this so? Why is it that when it comes to actual movement forward on the ground, there are so many slips between the cup and the lip?

Where’s the consumer?

Earlier this week, Finance Minister P Chidambaram, perhaps unwittingly, put his finger on a part of the problem.

In a remarkable speech, in terms of import, Chidambaram lamented the “regulatory capture” by industry. Regulatory capture happens when the regulator is dominated by the industry to such an extent that it eventually acts to the benefit of the industry it is regulating, rather than protecting consumers and ensuring a level playing field.

This is quite an extraordinary admission by a member of the ruling set-up. But it is no more than a recognition of facts. Whether it is telecommunications, or insurance or pharmaceuticals or energy or mineral resources, the regulators have looked at what industry wants or needs — and not the consumer.

But why stop with regulators? Every arm of government, from the legislative to the executive, has today been captured by interest groups — read individual businesses. Collectively, India Inc is allergic to charges of lobbying. In fact, the big industry bodies such as CII, FICCI or Assocham say they are there to engage with the government on policy issues and ensure that industry interests are taken into account in policy making. That, to my mind, fits the classical definition of lobbying. But, since the government officially does not recognise or admit to lobbying, and India does not have a Lobbying Disclosure Act on the lines of the US law, lobbying does not exist in India. Officially. And, Niira Radia was an uncomfortable aberration, one presumes!

Hurdles at every step

Today, lobbying — or whatever term you want to use for it — is affecting nearly every action of the government which impacts on one or the other business interest. For lobbyists, it is not enough to merely ‘engage’ with lawmakers to get a desired outcome.

The real battle begins thereafter. At every step of the way, provided you have the right contacts and access, you can ensure that endless roadblocks can be raised, on one superficially legitimate ground or the other.

Or better still, the ‘guidelines’ and ‘rules’ can be framed in such a manner that a discretionary clearance from some babu or the other is required at virtually every step.

Aviation is finally thrown open? But the guidelines say they are for existing operators to get fresh capital, not new investors, don’t they? Retail’s opened up to foreign investors? Oh, but you can only open shop in cities with this much population, and you will have to invest that much of your capital here. Yes, you can open your single brand store, but you can’t run a cafeteria inside. Oh, all right, you can run a café, but you can’t sell food items!

The list is virtually endless, which is why every well-intentioned move of the government to reform the competitive environment at the macro policy level has been more or less stymied at the micro, implementation level.

This is why power plants are not being built, roads are not being created, airfares are not falling despite ever more planes filling the skies, why the information highway is restricted to urban expressways…and why S&P insists, rightly, that reforms are not happening.

India Inc has been vocal about the need for faster, better and more reforms. But honest introspection will show that when it comes to actual implementation, self-interest trumps group interest, let alone national interest.

Crony capitalism is alive and well.

(Response to Raghavan.s@thehindu.co.in )