Leftist critics say economic liberalisation after 1991 led to the rise of crony capitalists blessed with political favours rather than business skills. The downfall of Naresh Goyal of Jet Airways tells a very different tale. He joins a growing list of failed, near-bankrupt cronies. Economic reforms since 1991 are very incomplete, yet have created enough competition to kill many politically powerful but incompetent cronies.
Of the many private sector airlines launched in the 1990s, Jet Airways alone survived. It benefited repeatedly from policy changes, and few believed this was just a coincidence. He started with the benefit of foreign partners with deep pockets — Gulf Air and Kuwait Airways. Then the Tata group proposed to compete with a new airline in collaboration with Singapore Airlines. Civil aviation policy suddenly changed, prohibiting foreign airlines from owning any equity in Indian carriers. This not only sank the Tata proposal but also meant Goyal’s foreign partners had to sell their holdings to him for a song. By 2003, Jet Airways had acquired substantial market share in India and wanted to fly abroad, a privilege restricted to Air India. Civil aviation policy duly changed to allow Indian private airlines to fly abroad, but the detailed rules were such that only Jet qualified.
In 2005, another famed crony, liquor baron Vijay Mallya, entered the sector with Kingfisher Airlines. This never made money even in the best years. Still, public sector banks happily bankrolled him, and even accepted the brand name of his losing airline as collateral for a big loan. The financial crisis of 2008 and the sharp rise in oil prices after 2011 plunged both Kingfisher and Jet into the red. Magically, government policy changed again to help them. Foreign airlines were suddenly allowed to invest in Indian carriers. This proved insufficient to save Kingfisher, but Jet was saved by an equity infusion from Etihad Airways. By another “coincidence”, the government gave Etihad additional flying rights on lucrative routes between India and the Gulf.
Yet the game was up. New no-frills airlines like IndiGo, SpiceJet and GoAir had entered the business and cut prices. In a price-sensitive market like India, full service airlines like Kingfisher and Jet found it difficult to compete. Kingfisher finally went bust after repeated rescues by public sector banks. Jet is now following suit. The political connections of Mallya and Goyal won them policy changes and bank loans galore, but ultimately competition in a liberalised market killed them.
This would never have happened in the pre-1991 licencepermit raj, which had no competitive markets. The government strictly licensed entry into any business, and many areas were reserved for the public sector. Every industrial licence was a quasi-monopoly gift. Any company getting an industrial licence automatically got bank funding, and even the worst performing companies were bailed out perennially with loan write-offs… No businessperson lost his company no matter how often he defaulted on loans. The old saying was that India had many sick industries but no sick industrialist.
The licence-permit raj was almost 100% crony capitalism. Free competition did not exist. Every industrial licence, import licence, foreign exchange allocation and foreign collaboration permit was a favour from politicians to businessmen, in return for financial and other favours. This was crony capitalism with a capital C. When Rahul Gandhi complains about crony capitalism today, somebody should remind him of his family’s contribution to it.
Reforms after 1991 increased competition, bit by bit, in sector after sector. Industrial licences were abolished. So were once-rationed import licences, foreign exchange permits and collaboration permits. Many controls remained, as is clear from this column’s account of how civil aviation policy evolved. But for the first time, new competition sank many of the biggest old names — Hindustan Motors, Premier Automobiles, JK Synthetics, DCM.
The recent Insolvency and Bankruptcy Code has hastened the demise of other big industrial debtors — Essar Steel, Jaypee, Videocon, Bhushan Steel and the Amtek group. In the 2000s, many new cronies roared into giant infrastructure projects. Today many of those projects are bust and their owners cut to size — Jaypee, Lanco, GMR, GVK, IVRCL, and Nagarjuna Construction. One of the most celebrated cronies, Anil Ambani, is in dire financial straits and escaped a jail sentence only because his elder brother paid his legal dues of over Rs 500 crore at the last minute.
Cronyism has by no means ended. But it has been downsized. In many other countries, cronyism means getting a monopoly to exploit forever. In India, it means temporary favours but no permanent monopolies, and so competition can ultimately kill the biggest cronies. That is progress.