RBI governor Raghuram Rajan has lambasted crony capitalism. Other critics say economic liberalization has enriched only cronies through monopoly profits from political allocations of land, minerals and spectrum.
Now big corruption is rampant. But I distinguish between crony capitalism and political protection rackets. The former bestows monopoly profits on cronies. But if after paying up, the businessmen get no monopoly or abnormal profits, it’s a protection racket. That’s more evident in India. Both are bad, but the first is worse.
Former CII chief Tarun Das once said 15% kickbacks were standard in government contracts. Infrastructure companies that paid up were seen as politically well-connected, and once enjoyed skyhigh share prices. Alas, even after paying up they often did not get the promised clearances, so many today are bust. That’s not monopolistic cronyism.
A look at the richest companies shows little evidence that success lies in government-gifted monopolies. The 30 richest families: Mukesh Ambani (Reliance Industries Ltd); Azim Premji (Wipro); Sunil Mittal (Bharti Airtel); Dilip Shanghvi(Sun Pharma); Anil Aggarwal (Sterlite); Shiv Nadar (HCL); Anil Ambani (Reliance Power and Communications); Kumar Birla (Grasim); Uday Kotak (Kotak Bank); Choksi-Dani-Vakil (Asian Paints); Gautam Adani (Adani Enterprises); KP Singh (DLF); VC Burman (Dabur); Keshub Mahindra (Mahindra & Mahindra): Adi Godrej (Godrej Industries); DB Gupta (Lupin); Rahul Bajaj (Bajaj Auto); Brijmohan Munjal (Hero): Subhash Chandra (ZEE): Naveen Jindal (Jindal Steel and Power); Vijay Mallya (United Spirits); Sajjan Jindal (JSW Steel); YK Hamied (Cipla); Pankaj Patel (Cadila); Kalanithi Maran (SUN TV); VC Sehgal (Motherson Sumi); Reddy family (Dr Reddy’s Labs); BK Parekh (Pidilite): BM Bangur (Shree Cement); and Sudhir Mehta (Torrent).
Almost all have created internationally competitive businesses. They include pharmaceutical producers with humble origins who are now global giants (Sun Pharma, Lupin, Cipla, Cadila, Dr Reddy’s Labs, Torrent). No monopolies have been conferred on the top auto performers (Mahindra, Bajaj, Hero, Motherson Sumi). India’s IT billionaires are all selfmade (Premji, Shiv Nadar). No monopoly benefits have been gifted to the top consumer goods producers (Godrej, Asian Paints, Dabur, Pidilite), cement producers (Birla, Bangur), TV channels (Zee, Sun), or metal producers (Jindals, Anil Aggarwal, Birla).
During the licence-permit raj, Dhirubhai Ambani got licences and clearances that nobody else could. Raghuram Rajan calls this crony socialism.
But once the licence-permit raj ended, competition replaced government gifts. However the licence-permit raj continued in natural resources, land and government contracts. These remain the messiest area, but constitute only a modest part of the economy. Most billionaires are in competitive sectors.
Today, Reliance Industries operates one of the biggest oil refineries and petrochemical complexes in the world. It has no monopoly. It is export-oriented, competing globally. It won its offshore oil-gas blocks in an open auction. Because of price controls, it has made hardly any money in oil and gas. The Economist recently produced a scathing review of Reliance, but also showed that its return on capital was only 11 %, below even the cost of capital. Despite his political clout, Mukesh Ambani does not deliver even a decent return, let alone a monopoly bonanza.
Gautam Adani is often called a Modi crony. Yet he got land from Congress at less than 1% of the price charged by Modi. Governments the world over woo industries with tax breaks and cheap land. The Special Export Zone for which Adani got cheap land has potential, but is today a tiny part of his global empire.
Adani is India’s biggest port operator (Mundra, Dahej, Kandla, Vizag, Goa, Dhamra); biggest power producer (plants in Gujarat, Odisha, Maharashtra and Chhattisgarh); and biggest seller of branded edible oil. His biggest project is a mammoth $ 16.5 billion coal project in Australia which experts fear will sink him. But clearly it’s not a crony project.
Cronyism exists. Of the top 30, land baron KP Singh of DLF is famous for deals with Robert Vadra.
Another crony, liquor baron Vijay Mallya, got all parties in Karnataka to gift him a Rajya Sabha seat. But he now stands decimated. Telecom companies got spectrum cheaply, yet India has no telecom monopolies. Rather, it has more telecom operators than almost any country in the world, and the cheapest rates.
Rajan worries most about cronyism in contracts.
This is worst at the state and local levels. In some local bodies, every elected member is a contractor.
But these are not India’s richest businessmen. Rather, the richest (with few exceptions) have created competitive businesses, while paying protection money. Rajan is right that crony capitalism is highly damaging. So is protection money, though less so.
In India, the latter problem is dominant.