In the previous article in this blog, “Does the Idea of Crony Capitalism Have Anything to do with Indian Polity and Economy?” dated September 19, 2015, I expressed my skepticism about applying the concept of Crony Capitalism to Indian polity and economy and the reasons behind my skepticism.
It was explained in that article that India had always been a socialist and fascist country since independence based on dominance of the Public Sector Undertakings in the Indian economy – as a form of socialism – and the License-Permit-Quota Raj established starting with the Industrial Policy Resolution of 1956 – as a form of fascism. Besides, the various constitutional amendments restricting the freedom of speech and expression as well as private property rights reinforced that trend. The Directive Principles of the State Policy is the socialistic part in our constitution. This obviously means that what is usually called crony capitalism, in the Indian context, is actually crony socialism and crony fascism. That article examined the question whether Crony Capitalism would be applicable to India or not mainly from a theoretical perspective.
In this post, to deal the question from the practical aspect, I will select some articles on Crony Capitalism being supposedly practiced in Indian polity and find out what are the nature of the processes or practices that the authors consider as Crony Capitalism and examine whether any reason is being offered in support of their claim, and whether any remedies have been suggested for such a problem.
(In a laissez-faire capitalist economy, gold standard is the basic principle by which monetary policy is conducted with no role for the Government or its institutions. In India, Reserve Bank of India overseas the monetary policy by controlling the money supply in the economy and also has almost total control of the functioning of banks (both PSBs and private Banks), the principle by which the fascist ideas lead to the control of the economy by the government. Therefore, in India, the basis of any practices or policies in the banking industry can only properly called crony socialism or crony fascism or both, not crony capitalism.)
Cronyism in Public Sector Banks: Predominantly Crony Socialism:
In every article that has been in print recently on Cronyism in Public Sector Banks, the author almost invariably terms it as Crony Capitalism. In a society that has been built on the principles of laissez-faire capitalism, there would not be any Public Sector Banks, and therefore, this particular type of cronyism would not be possible in Capitalism.
Public sector banks are instruments or organizations based on and derived from the ideals of socialism, and if there is any cronyism in such a setting, it must be because of the nexus between bank staff, government bureaucrats, businessmen, and politicians. The principle of socialism is what has opened such a possibility for the politicians through PSBs to work in connivance with some bank staff, and some government bureaucrats and help the businessmen obtain a loan and then default on it. That would only mean cronyism working in combination with socialism and should be properly called crony socialism, not crony capitalism.
I will still try to look some of these articles and find out whether any one author has used some process or method unknown to me that he has identified with which he conflated the idea of cronyism and capitalism.
The first article I picked up was titled attractively, so I thought the author might have something really significant to say on the subject: “Crony Capitalism Thrives, PSU Banks Robbed Blind” dated December 7, 2014, in The New Indian Express.
After reading the whole article, I was disappointed. Except for the title, there was no mention of either the word cronyism or capitalism. The author writes about “intricate machinations between Indian banks, specifically the PSU banks, and their profligate clients who have borrowed humongous sums of money from the former and conveniently defaulted on the repayments.”
He went on to write that Public sector banks in the country wrote off Rs 34,409 crore of bad debts in the financial year 2013-14, compared to Rs 27,231 crore in the previous fiscal year. This write-off accounted for 34 percent of the Non-Performing Assets (NPAs) of the PSU banks.”
Without aiding and abetting by the bureaucrats or politicians or both, these businessmen could not have indulged in cronyism in PSBs to get these loans as the PSB are controlled by the government and the government is run by the ruling party of the time. Then, how come that author can call this Crony Capitalism?
The title of the article at first made me think that I would be able to find out some method by which the author is going to conflate cronyism and capitalism, but I did not find even any such attempt being made by the author in the entire article. Since he was writing obviously about cronyism in the socialistic creatures called Public Sector Banks, he should have titled the article “Crony Socialism Thrives.” I doubt the author has any idea, even remotely, of what capitalism is!
There is another article in the right-of-center magazine Swaraja titled, “The Mess Our Public Sector Banks Are In” dated June 27, 2015.
Here again, there is no mention of either cronyism or capitalism with one exception where the author raises a question, “Why would public sector banks lend to houses that have risky businesses to their portfolio? Crony capitalism? An absence of competent due diligence systems – those that are comparable to private banks? Both?”
But, there is no further detailed treatment of this question although the article is about cronyism in Public Sector Banks. The author in the whole article did not establish the relationship between these two concepts of Cronyism and Capitalism. If he had tried, he would have come to the conclusion that he should use the words Crony Socialism instead of Crony Capitalism.
Another article with a heading, “Crony Capitalism and the Crisis in Public Sector Banking” in DNA dated January 20, 2015, starts with a right premise in an effort to identify the problem in Public Sector Banks.
“The new generation private sector banks generate better returns for their shareholders, operate at better margins and surprisingly even have a lower staff cost as a proportion of the total income they make, in comparison to public sector banks.”
He also identifies the reason correctly for this problem: “There are multiple reasons for this difference in performance. First and foremost, private banks do not have to deal with political pressure to make loans to favoured individuals and companies.”
He then writes about an example of a businessman who got a loan from a PSB, “a whopping Rs34,877 crore. Against this, the company had an equity of only Rs1,457 crore, meaning a debt-equity ratio of 24:1.”
This again would not have been possible without political pressure from the powerful bureaucrats and/or politicians to the bank authorities to extend such a dubious loan, which preciously how the process of crony socialism would be working in a government owned institution. The author was accurate in his predictions that private sector banks would not sanction such a high-risk loan and would have asked for and got more equity to make at least a deb-equity ratio of 5:1, which is the way in which capitalist organizations work.
“But public sector banks did not operate in a similar way when it came to giving out loans to crony capitalists. Crony capitalists got away without putting much of their own money at risk…. … It is well known that many crony capitalists in India operate in the infrastructure sector. The higher exposure to this sector has led to higher stressed advances as well.”
In this article also, the author does not give any reason why he used the concept “crony capitalists” instead of “crony socialists,” which is the right word here.
Again, the infrastructure sector is dominated by government, either through socialism or fascism. The concept of private property has not taken root in our country in this sector, and the government – and the politicians as the representative of the government – has discretionary power over acquiring landed property for building roads, bridges, ports, airports, etc. The government of the day can favor some people of its choice both in acquisition of property for these purposes and can decide and select companies and businessmen who will build the infrastructure with obvious unfair financial benefit. This is the sector where both crony socialism and crony fascism are most obviously clear for everyone to see.
The apparent conclusion from what the author talks about is that Crony Socialism combined with Crony Fascism as has been working in the Public Sector Banks. All the ills of PSBs are the result of cronyism that has been indulged by the bureaucrats and politicians and businessmen.
One redeeming feature of this article is that it has attempted to offer some genuine solution to the problem of cronyism in public sector banks. This article wants the government to sell at least 15 small PSBs out of 25 to the private sector and wants the government to keep the rest. It also claims that the money got from this process should be used to infuse capital and thus raise the financial health of the other 10 government owned banks.
It could have asked the government to get out of the banking industry by selling all the 25 PSBs, but to expect such a bold solution from anyone in India in an atmosphere of the dominance of welfare state ideas among intellectuals in India is much more than what one can expect.
After reading so many articles on cronyism in PSBs, I still could not understand how these two concepts could be linked and the processes be described as crony capitalism. Then I realized that what the authors of all these articles assume to be the definition of a capitalist.
According to all these authors, the underlying definition of a capitalist is someone who employs capital in business. On such a definition only, these articles would make any sense. But, that is not the definition of a capitalist. That is the definition of a businessman. Not all businessmen are capitalists; in fact, in India, most of the businessmen are socialists and they subscribe to some fascist ideas as well, as most socialists do, which make them indulge in cronyism.
A capitalist businessman would only want to earn his fortune through his performance as a businessman by exhibiting his products and services in the marketplace. A capitalist is not the one who employs capital but one who believes in the political philosophy of capitalism as the best form of social organization.
Of course, it is too much to expect from journalists a clear understanding of political and economic concepts. But these articles are the indication of the fact that Indian intellectuals, from whom the journalist pick up ideas, are afflicted by certain kind of misconceived notions and ideas of political economy that connote rather than denote capitalism.
They might have probably picked up such ideas during their college days from their professors and peers without critical enquiry and have emotionally attached to those connotations, and such ideas have become so automated without any critical thinking and have become their chronic habits and they acquire the habit of spitting up those ideas that they had memorized in those college days as the children habitually do in school.
Coming to the present topic, one very important point about the performance of PSBs is about the risks involved in businesses and how the banks estimate those risks before deciding whether to extend loans to businesses.
There are many sectors of Indian businesses with capital-intensive and high-risk industries like Iron and Steel and many other infrastructure industries, and loans advanced by the banks to them may become NPA not necessarily because of cronyism but because of the real risks in the business environment in which they perform, particularly when the government control in these industries is much more pronounced manner than in other industries. Likewise, the sectors like power generation, where the companies have to sell power to state governments – as the state governments exercise monopoly power in the distribution of power, which usually keep huge amounts outstanding to the companies, and because of this, the loans advanced to them by banks may fall in the category of NPA.
This process of loans obtained by businessmen in the infrastructure sector may become bad loans and become NPA due to the intervention of government in these sectors in a more pronounced manner than in other industries, and this process should be termed crony fascism, and if the banks that are involved in these loans are PSBs, then it a process of crony fascism combined with crony socialism.
Another important issue here is to find out which kind of loans have turned NPA because of cronyism and which might have been so because of the actual risks in such businesses.
I expected an article or two to identify these issues and suggestion of some remedial measures to deal with these issues, but I have found not many articles except one. All the journalists were eager to blame “crony capitalism” and were satisfied with their denouncement of it as evil without exactly identifying what “crony capitalism” means.
The one article on this issue was titled, “Why PSU banks are facing similar NPA problems they faced in the 1990’s.”
But, this article only identified the percentage of NPA to high capital intensive high-risk sectors, but it has not made any analysis of how much of NPA is due to this and how much is due to cronyism.
Articles on Cronyism in Various Industries and in Overall Economy of India
The articles on cronyism in Indian economy in sectors other than PSBs follow the same pattern as the articles on PSBs. The authors are without any understanding of the basic principles of fascism, socialism, and capitalism, and the difference between them, and as a result, they substitute capitalism for fascism. This was the reason why nobody in all the above articles has even made any attempt to offer any workable solution to the problem, while everybody seems to be sure of the nature of the pervasive problem of cronyism in the Indian economy.
It was a relief for me for me finally to find an article wherein the author gives some definition of what crony capitalism is, which makes clear the fact that fascism has been the guiding principle of the malaise in the Indian economy.
In an article dated Sep 13, 2014, “Crony capitalism killing transparency and competition, says CAG Sashi Kant Sharma,” published in Firstpost.
In Capitalism, every property is privately owned. When CAG Sharma states that “misappropriation of public resources,” it obviously means not capitalism but either socialism or fascism. “Competition” is the hallmark of capitalism, then how can it be sacrificed in a system called capitalism? Sharma does not realize, like all the authors of articles on Crony Capitalism that what he was talking about was either fascism or socialism.
Sharma goes on to say “Crony capitalism generally refers to a business environment where success depends upon close relationships between corporates and government functionaries.”
I want to quote here what Benito Amilcare Andrea Mussolini (1883-1945), author – along with Giovanni Gentile (1875-1944), the Italian neo-Hegelian Idealist philosopher, – of “The Doctrine of Fascism” wrote about Fascism and Corporatism.
Is there now any doubt now about what is generally called Crony Capitalism is in fact Crony Fascism?
The authors of these articles do not understand the difference between capitalism and fascism. They ascribe to capitalism policies and principles that are clearly fascist. They have no idea of what capitalism is and how it works and that it has nothing to do with government getting involved itself in the economic and business activities of its citizens.
In a laissez-faire capitalist economy, cronyism would not succeed, like what is happening in India, the land of crony socialism and crony fascism. Even if a company owned by a family tries to appoint one of the heirs to a position of authority beyond his capacity, that company would not be able to survive in the free market environment against competition from professionally run companies.
Even in a relatively free country – but not a fully laissez-faire economy- like USA, the fact that many Indians are now working as CEOS of great companies like Google, Microsoft, Pepsi, Adobe Systems, MasterCard etc., which are companies started and owned by Americans, is one example of how cronyism is almost nonexistent in the private sector of the economy. So Crony Capitalism, in the present era, where almost all the countries are of mixed economy type, is an oxymoron. What is usually called crony capitalism is actually crony socialism or crony fascism or a mixture of both.
It was a great relief to read an article – even if only a letter in response to an article – in The Wall Street Journal, which clearly identifies that what is generally thought as crony capitalism is in fact either crony fascism or crony socialism titled, “It Is Crony Fascism More Than Capitalism” dated August 14, 2014.
For some more readings on the subject, see “Leftist Hypocrisy about Crony Capitalism” including some more than 30 comments in the American Thinker dated June 13, 2015.
I want to end this article by quoting from a research paper “The economics and history of cronyism” by David R. Henderson published by George Mason University.
“Cronyism is the substitution of political influence for free markets. It comes about when Government has a lot of power over private-sector decisions and when the government officials in power have great discretion over how to use it. Cronyism is not simply a zero-sum game that takes from some and gives to others; it is negative-sum. The losses to the losers substantially outweigh the gains to the winners. In short, cronyism destroys wealth. By shifting power to Government, cronyism makes political power more important and increases the competition for that political power. The way to reduce or end cronyism is to reduce or end that government power.”