Opinion These difficult years
Be worried: cosy businesses are outpacing competitive ones
The scandals surrounding the 2G spectrum and the so-called Radiagate tapes have resulted in the usual Indian clamour. Let us get someone. Some heads need to roll. Such are the predictable responses. There is very little talk about placing the issues within a theoretical framework of political economy. In the absence of such a framework,we are left with inept and compromised law enforcement agencies making largely symbolic attempts to pick on individuals while ensuring maximum publicity for their actions. The legal cases,we know,will drag on for decades and then end with a whimper,if that. The more important matter is to understand the underlying issues and evolve a set of institutional processes that makes the workings of the Indian Republic more efficient and less prone to loot with official connivance. The economist Raghuram Rajan has made an interesting point: we need to take a look at the sectors where wealth is being created at an accelerated pace and based on this analysis,come up with a sound response grounded in valid theory. Otherwise we will be a nation of ineffectual angels beating our wings in the void,to quote what Andre Maurois said in a different context.
Broadly speaking,there are two kinds of businesses: competitive and cosy. One could argue that in the decade leading up to the year 2000,as we experienced the Narasimha Rao-led liberalisation,wealth was created in competitive industries like IT,retail and automotive. In the next decade,wealth creation seems to have shifted to industries where the firmans of our sultans (how else can we describe our rulers ensconced in Delhi?) have been the drivers,that is,in cosy industries. Extractive businesses (iron ore,gas,bauxite) or real estate (where billions of rupees of value hinge on one land use or FSI directive) or public works (for example,highways) or SEZs (land-grabs with a reverse Robin Hood logic where the tyrant state takes from the poor peasant Peter to give to the rich magnate Paul),telecom (where a common resource is made artificially scarce by reserving large portions for the so-called defence of the realm and is then doled out bit by bit to favoured courtiers) these are the areas of the economy that have taken the lead in wealth creation. Our babus do not need to visit Mauritius or Cyprus to find out how this wealth is salted away in benami instruments. Just taking a look at the market capitalisations of listed public companies will suffice.
Regulatory capture is an idea first articulated by the Nobel-prize winning economist George Stigler who made detailed studies of regulated industries like railroads. He concluded that there was a strong incentive for companies in these industries to persuade regulators to write seemingly innocuous rules in a manner that favoured the companies rather than consumers or the country at large. Stigler showed that in many cases the same individuals went back and forth between the companies where they were senior executives and the regulatory agencies where they were now senior officials. The pattern of erstwhile regulators turning into lobbyists for the regulated companies is repeating itself in India. The only way to prevent this outcome,which is both morally unfair and economically inefficient (as total value and output gets reduced),is to try and evolve institutional processes that are consciously transparent and designed to encourage competition,easy entry and easy exit.
The question then is how,despite all the cosy alliances that exist in the US,wealth creation has still remained to such a large extent in competitive rather than cosy industries. After all,the richest Americans still are persons who have created value in fiercely competitive industries like IT. Think of Gates. Jobs,Ellison and so on. These names have not been replaced by the founders of Halliburton or Blackwater. No one argues that there is no crony capitalism in the US. It just appears that in relative terms it has less weightage. To attempt to eliminate crony capitalism in India is not a task that even Lord Krishna would agree to undertake. What we can aim for though is to try to reduce its importance. In India,autonomous agencies created by constitutional mandate (for example,the Election Commission,the Supreme Court,the Comptroller and Auditor General) or by statute (for example,the Reserve Bank,Sebi) have so far functioned well and have even survived periods of aberrant and compromised leadership. We need to set up more of these and bring them under the direct supervision of Parliament rather than the existing system where ministers and permanent civil servants exercise excessive control. Edmund Burke was in favour of parliamentary oversight. He felt that this would ensure a greater degree of transparency and popular legitimacy. There is nothing in the Constitution of India that prevents us from having the Trai being genuinely autonomous and being grilled every quarter by a permanent Oversight Committee of Parliament. We should give this option serious consideration.
Can one be optimistic that the cathartic effects of the present crisis will lead to systemic corrections that move more of our economic value creation into competitive rather than into cosy areas? Unfortunately recent developments give no case for any such sanguine expectation. Even in the US,the separation of banking and commerce is a basic feature of the economic system. The Dutt and Hazari commissions reports of the 60s (who remembers them?) produced so much evidence that banks controlled by business houses (a uniquely Indian English expression) were involved in incestuous dealings. And yet,the powers that be are now contemplating giving banking licences to these same business houses and are trying to justify this as being in line with free-market ideas. Such ironies are inevitable when history is forgotten.
But one still hopes for the best. Having been a prime mover of the economic liberation of India,one hopes that our prime minister would not like to go down in history as having presided over an era of regulatory capture and crony capitalism.
The writer divides his time between Mumbai,Lonavala and Bangalore jerry.rao@expressindia.com
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