Monday, August 25, 2014

Today's Editorial 23 August 2014

 Crony capitalism threatens growth

Source: By N Chandra Mohan: The Free Press Journal
The Reserve Bank of India Governor Raghuram Rajan has forcefully underscored the danger that crony capitalism poses to India’s growth story. While delivering the Lalit Doshi memorial lecture, he argued that it creates oligarchies that slow down growth. This is not the first time that he has held forth on this topic. India has the ‘dubious distinction’ of the largest number of billionaires per trillion dollars of GDP; that many of them have amassed wealth from land, real estate and natural resources due to proximity to government. This eliminates competition, widens disparities and slows growth.

The dark side of crony capitalism is reflected in the sharp rise in big- ticket corruptions after reforms were implemented since 1991, a fact that upsets even the ardent advocates of liberalisation. The late economist I G Patel admitted that one of his greatest disappointments was that reforms have not “made much impression on corruption.” This was par for the course in the earlier license- permit raj -- in which vast discretionary powers encouraged rent- seeking or garnering of huge benefits by manipulating the environment in which economic activities take place by those in authority.

The concern is that crony capitalism has replaced crony socialism of the licence- raj. Reforms were meant to be an answer to corruption as economic activity was decontrolled, delicensed and deregulated. Many of the old forms of corruption associated with the regime of controls, thus, were greatly reduced, especially in manufacturing. But the license- permit raj is still alive and kicking in mining and services. The discretionary award of coal blocks and 2G telecom spectrums at throwaway prices, resulting in huge losses to the exchequer, exemplify what a crony capitalist regime entails.

India’s growth may be in a tailspin, but the number of Indian billionaires keeps increasing! Five of the leading ones alone account for less than half of total billionaire wealth. Billionaire incomes amounts to a substantial fraction of the goods and services produced in the country or GDP. There are no prizes for guessing that disparities have widened in this milieu, thanks to the growing share of the benefits of growth being cornered by highly affluent segments of society. Sooner or later, this is bound to trigger a backlash as many of them have become wealthy due to proximity to government.

Professor Abhijit Banerjee of MIT and Thomas Piketty of the Paris School of Economics – who has written the bestseller ‘ Capital in the Twenty First Century’ -- have used income tax returns to assess trends in income disparities in India. What they find is that there is growing concentration of income among the top one per cent of the population, especially in the reform era. During the 20th century, the share of top incomes followed a U- shape by being high and then falling and rising again. Unfortunately, such detailed income tax information has stopped since the early 2000s to establish more recent trends.

From 1910 to 1950 -- a highly unegalitarian phase, in which India was a colony of the British – the share of the top one per cent of the taxpaying population accounted for 15 to 18 per cent of total income.

By contrast, 1950- 1980 saw a more egalitarian phase, in which the government followed socialist policies by heavily taxing incomes at the higher end. The share of the top one per cent came down to barely 5- 6 per cent. But thereafter till 2000, with more pro- business policies and beginnings of reform, the share of the top one per cent started climbing up to 12- 13 per cent of total income, clearly following a U- shape.

Although the increase in top incomes is a fact, most of the gains have gone to the ultra- rich segment in this group (0.1 per cent). In the 1990s, it was the ultrarich that enjoyed income growth that was much faster than the overall GDP growth, in contrast to the 1980s, when there was faster growth for the top one per cent group as a whole. The liberalisation of the economy clearly is the backdrop against which this amassing of wealth has taken place, much of it due to closeness to political power. It is precisely this group of ultra- rich that contributes to the growing ranks of billionaires and dollar millionaires in the country.

The growing concentration of income among the billionaires sheds light on the growth paradox of the 1990s observed by researchers. The growth of expenditures (consumption) was very limited while there was substantial growth measured by the national accounts. A significant part of this paradox – between one- quarter to one- thirds -- is explained by a large part of growth being cornered by the very rich.

The trend of growing inequalities in India clearly follows the US pattern, where CEO pay has widened substantially vis- a- vis the American worker’s income. This, in turn, has triggered a backlash like the Occupy Wall Street movement, whose slogan is that we are the 99 per cent, in contrast to the top one per cent, who control 23.5 per cent of income. Such a trend has been observed in other developed and emerging economies as well, including China. Rising inequality indeed is a global concern which, as Piketty argues, will worsen in the future unless it is checked.

A crony capitalist regime shuts down competition and thus is inimical to free enterprise, opportunity and economic growth, argues Rajan. The massive concentration of incomes has also considerably eroded the tax base of the exchequer; as such incomes escape the gaze of the taxman.

For a sense of perspective, the number of those who report a taxable income of Rs 1 crore is only 43,000, while the number of dollar millionaires resident in the country is five times higher and is growing rapidly. The upshot is that crony capitalism constrains any effort to kickstart growth through budgetary surpluses.

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