Crony capitalism in India

Crony capitalism is a concept that puts the spotlight on the nexus between politicians and businesspersons. It refers to an economic scenario wherein the success of businesses is dependent on your relationships with politicians and other people in power. It’s called crony capitalism because it’s where the ‘cronies’ of those in power get preferential treatment.

The Economist’s Crony Capitalism Index

The Economist annually publishes a Crony Capitalism Index. India ranked 9 out of 23 countries in the 2014 version of the Index. This was an improvement over India’s 2013 ranking of 6.

Issues arising out of crony capitalism

  • High prevalence of crony capitalism is generally an indicator of wealth being concentrated in the hands of a few people, high levels of corruption and great economic inequality
  • It slows down economic growth by eliminating competition in the markets and creating a virtual monopoly of the powerful
  • It undermines the principles of natural law, due process and the bedrock on which a democratic society is built
  • Democracy devolves into an oligarchy or a plutocracy
  • A multitude of legislations are violated by instances of crony capitalism
  • Distorts economic balance by favouring certain businesses and harming free enterprise and opportunity

An inevitable side-effect?

Some consider crony capitalism to be an unavoidable outcome in a capitalist economy. The socialist critique of crony capitalism propounds that in a capitalist economy, money is power and holds supreme; and hence, it follows that people with economic clout can buy influence with the political class.

However, the capitalist critique of crony capitalism also opposes it, but perceives it to be an outcome of excessive governmental regulation. If free market forces were allowed to operate, then cronyism wouldn’t come into play. Governmental interference is the cause of crony capitalism, according to this critique.

Crony Capitalism in India

Crony capitalism received an impetus from the License Raj in India. The requirement of government licenses and approvals for every small endeavour made India especially vulnerable to cronyism. There are multiple instances of politicians having favoured certain business families or enterprises throughout India’s history. However, in the post-liberalisation era, the situation has slightly improved due to the decrease in governmental role with respect to private enterprise.

Question for UPSC Mains:
What is your understanding of crony capitalism? How does it affect a country and its economy? Do you think crony capitalism is a natural consequence of capitalism? Provide justifications for your answer.