Crony capitalism killing competition and transparency, says RBI Governor

According to Rajan, one of the greatest dangers to the growth of developing countries is the middle-income trap.

By: ENS Economic Bureau | Mumbai | Updated: August 12, 2014 10:31:24 am
RBI Governor Raghuram Rajan slams 'venal politicians' saying they are 'harmful to free enterprise, opportunity, and economic growth'. RBI Governor Raghuram Rajan slams ‘venal politicians’ saying they are ‘harmful to free enterprise, opportunity, and economic growth’.

Reserve Bank of India Governor Raghuram Rajan on Monday made a scathing attack on “venal politicians” who perpetuate crony capitalism which is “killing transparency and competition” and “harmful to free enterprise, opportunity, and economic growth”.

“A dispassionate view of both our democracy and our economy would suggest some concerns. Even as our democracy and our economy have become more vibrant, an important issue in the recent election was whether we had substituted the crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians,” Rajan said at the Lalit Doshi Memorial Lecture here.

“And by substituting special interests for the public interest, it is harmful to democratic expression. If there is some truth to these perceptions of crony capitalism, a natural question is why people tolerate it. Why do they vote for the venal politician who perpetuates it?” he asked.

According to Rajan, one of the greatest dangers to the growth of developing countries is the middle-income trap, where crony capitalism creates oligarchies that slow down growth. “If the debate during the elections is any pointer, this is a very real concern of the public in India today,” he said.

“To avoid this trap, and to strengthen the independent democracy our leaders won for us 67 years ago, we have to improve public services, especially those targeted at the poor. A key mechanism to improve these services is through financial inclusion, which is going to be an important part of the government and the RBI’s plans in the coming years,” Rajan said.

In a candid observation on the scenario in India, he said, “The circle is complete. The poor and the under-privileged need the politician to help them get jobs and public services. The crooked politician needs the businessman to provide the funds that allow him to supply patronage to the poor and fight elections.”

Further, the corrupt businessman needs the crooked politician to get public resources and contracts cheaply. And the politician needs the votes of the poor and the underprivileged. “Every constituency is tied to the other in a cycle of dependence, which ensures that the status quo prevails,” he said.

“We need to go back to the drawing board. There is a way out of this contradiction, developing the idea that money liberates. Could we not give poor households cash instead of promising them public services?” he asked.

… plans basic banking products for the poor 

MUMBAI: The Reserve Bank is going to nudge lenders to offer a basic suite of products to address financial needs, RBI chief Raghuram Rajan said. “If we are to draw in the poor, we need products that address their needs; a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the moneylender, easy-to-understand accident, life and health insurance, and an avenue to engage in saving for old age,” Rajan said. ENS

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