Better, but only just

India's fight against crony capitalism

Crony capitalism is a concern not just in India; it is an issue worldwide. Across the globe, well-connected individuals are making vast fortunes through rent-seeking. Parlaying closeness to the government or to those in power into licences, favourable regulation or even blindness to lawbreaking can lead to the building up of vast fortunes. One way to measure this tendency, as has been argued for some time, is to examine where a country's richest people make their money. If it comes from sectors where government has a big role - as a licence issuer, or a source of patronage, like natural resources or defence or real estate - then rent-seeking dominates the economy. If it comes from other, more open sectors - like information technology or consumer goods - then crony capitalism is likely to be less of a problem in that economy.

The Economist has built on this idea to construct an index of 23 economies, ranked by the amount of crony capitalism. Hong Kong, Russia, Malaysia and Ukraine are the top four by this consideration - though it is possible that Hong Kong's rank, like that of Singapore's at number five, is swollen by the high price of real estate in those city-states. India, by The Economist's reckoning, comes in at number nine, second-worst in the BRICS. But, as the newspaper also points out, India has considerably improved its score since 2007. In other words, the system has been working to cleanse itself of rent-seeking. Many of those who had made vast fortunes in industries and sectors where connections mattered have been struggling to hold on to their fortunes. That has, after all, been one of the major stories of the past few years. India, if it wishes to reduce crony capitalism even further, should ensure that those who have tried to dominate these sectors are encouraged to come clean and adhere to rules or exit. A clean-up operation or a higher turnover in politically sensitive sectors is one way to insure against the build-up of oligarchy.

It is worth noting that this reduction in crony capitalism has come at a cost. It has been accompanied by, and has had a mutually reinforcing dynamic with, the collapse of investment. India has managed to improve its score through brute political force: through democratic power rather than through institutional strength. Instead of ensuring that only those who have misused power, or benefited from that misuse, are held to account, the overall response to rent-seeking has been to shut down an entire sector or to cancel entire swathes of licences. This betokens a weakness of institutions. Indeed, The Economist also argues that India has seen a persistent weakening of its institutional strength. Had the political climate in India been combined with - and worked through, rather than instead of - stronger institutions, then the fight against cronyism would have worked better, and probably been more sustainable. In the end, the only real way to end cronyism is to change the structure of the economy. An economy that is dependent on natural resource extraction, for example, like Russia's, is always likely to become prey to an oligarchy. India needs to work to reduce the economic salience of state clearances and the relative size of rent-seeking sectors in its economy.