The Crony Capitalism Bugaboo

India is a better place than it was during the heydays of socialism because there is more transparency. It is easier to counter lobby. And crony capitalism has been put on watch; crony socialism never was.

Ever since the Supreme Court order on the coal block allocations came, the Syndicate of Socialists has been on a roll. Smug smirks on their faces they point out that the entire mess has proved every warning of theirs right – the private sector is rapacious and unscrupulous, market forces are have no morality and the opening up of the economy in 1991 has only encouraged crony capitalism.

Fortunately, the defenders of free markets have not been pushed on the backfoot, as they usually are by all bleeding heart baloney. They have been the first to welcome the order and seeing in it an opportunity to clean up a mess that is the result of what Firstpost’s R Jagannathan calls crony socialism. The order has paved the way for putting in place a more transparent system where the scope for hijacking by a crooked politician-businessman nexus will be minimised.

But let’s take on this oft-repeated assertion that the 1991 liberalisation process has fostered crony capitalism and businessmen and industrialists are getting away with all kinds of shady shenanigans.

Yes, certainly, the camaraderie between business people, politicians and bureaucrats is more open and unapologetic than in the pre-1991 days, when it was more covert and sly.

Yes, corruption seems to have increased. In their book, Corruption in India: The DNA and the RNA, Bibek Debroy and Laveesh Bhandari have noted that reforms seem to have thrown up opportunities for big-ticket corruption and that the frequency and monetary value of scams has increased since 1991.

But.

The corporate sector has never been under as much scrutiny as it has been now. Indian jails had never played host to as many top business leaders as they have been doing now – B. Ramalinga Raju, Jignesh Shah, Shahid Balwa, Sanjay Chandra, Neeraj Singhal, Vinod Goenka (out on bail now), Subrato Roy. And notice that no one is crying about witch-hunts, the way they did when, in the mid-eighties, V. P. Singh as finance minister put venerable names like Lalit Mohan Thapar and SL Kirloskar behind bars for allegedly violating foreign exchange laws. Before that, the only well-known industrialist who did a stint behind bars was Ramakrishna Dalmia in the 1950s, in an embezzlement case. There is recognition and acceptance now that if businessmen try to game the system they will have to pay for it.

That is the difference between pre-1991 and post-1991 India.

In pre-1991 India, managing the environment was more important than managing the market. In post-1991 India too, businessmen do manage the environment with the help of obliging politicians and bureaucrats and by silencing the media with threats of pulling out ads and filing defamation cases. But they succeed only up to a point. Beyond that point, they are brought up short against market agencies (rating agencies, market analysts) and independent regulators and the odd crusading NGO tapping the courts for redress.

How did the cooking of the books of Satyam Computers get outed in early 2009?  Stock market analysts and institutional shareholders raised the red flag in late 2008, when Satyam approved the acquisition of Maytas Infra and Maytas Properties in what Ramalinga Raju later admitted was a bid to replace fictitious assets with real ones. A market-related institution, Securities and Exchange Board of India (Sebi), had to get a Supreme Court order to interrogate Raju because a state agency – the state police – was denying it access to him. Raju had enormous clout with both the Congress and the Telugu Desam in erstwhile Andhra Pradesh.

What led to the comeuppance of Jignesh Shah? It was a payment crisis at the National Spot Exchange Ltd (NSEL), which was promoted by his company, Financial Technologies, that saw an empire built on shaky foundations collapse like a house of cards.  No government patronage could save it.

How did the flamboyant Subrato Roy, who flaunted his proximity to politicians cutting across party lines, go behind bars? Roy had defied Sebi, which had restrained two of his companies from taking deposits from the public, since 2010. He tried every legal measure open to him to get his way, but ultimately nothing worked.

It is not as if the government was not unaware of things not being quite right in the case of both Shah and Roy. Remember, former member of Sebi, KM Abraham, had written to the Prime Minister’s Office in 2011, saying he was under pressure from the finance ministry to go easy on some business houses, including Roy’s Sahara and Shah’s MCX. But neither the PMO nor the finance ministry acted on his letter. Ultimately, though, political clout did not save both businessmen from market realities and regulatory independence respectively.

The limit to managing the environment is the result also of an increase in competition, again a post-1991 phenomenon. Earlier, there were a limited number of players in any sector, making manipulation and the suppression of dissent easier. That is no longer the case. There are also tougher corporate governance and disclosure norms in place, far more stringent than when the state was micro-managing businesses. Some years back, a real estate biggie’s plans to tap the market suffered a blow when the editor of a business paper wrote a story based purely on a close reading of the company’s red herring prospectus.

Yes, frauds still take place. Market players are not always scrupulous – Satyam could not have falsified accounts for years without the knowledge of its auditors. Independent directors don’t play the vigilante role that they should. For every case that independent regulators crack down on, there are allegations of them turning a blind eye to two more. There are still regulatory grey areas that dodgy businessmen can play in. The rule of law is not as robust as it needs to be.

And yet India is a better place than it was during the hey-days of socialism because there is more transparency. It is easier to identify and counter lobby because it is more overt than it used to be. And crony capitalism has been put on watch; crony socialism never was.