Don't over-interpret The Economist's crony index
Much has been made in the Indian media of The Economist’s crony-capitalism index and the decline in the wealth of crony billionaires as a proportion of each country’s GDP, probably spurred by the fact that the newspaper’s special mention of India’s efforts in curbing cronyism coincides with the Indian government’s narrative on the issue—in 2008, The Economist says crony wealth in India totalled 18% of GDP and is today down to 3%, as a result of which ‘the pin-ups of Indian capitalism are no longer the pampered scions of its business dynasties, but the hungry founders of Flipkart, an e-commerce firm’. But before celebrating, keep in mind that a lot of the fall in so-called crony wealth, the world over, is the result of the sharp fall in commodity prices—once these recover, so will the crony wealth; in any case, crony wealth in India has only fallen from 3.62% of GDP in 2014 to 3.36% in 2016, leaving the country’s rank at the same 9th position in both years.
Also, while the NDA has cleaned up the process of awarding natural resources such as coal and other minerals by ensuring this will be done through auctions in future, this needs to be put in perspective—while the biggest natural resource allocated to business is telecom spectrum, apart from the Raja scam of 2008, telecom spectrum has mostly been bid out in transparent auctions since 2001 onwards. But because The Economist defines crony sectors as those which are licensed by the state or involve a lot of interaction with it, any telecom billionaire—such as a Sunil Mittal who operates in a ferociously competitive environment—is considered a crony despite the fact that firms like his have bid an average of R58,000 crore for spectrum in each of the last five auctions; the last auction fetched R110,000 crore.
Cronyism, however, cannot be ascertained by defining an industry as crony, it has to be about a process which is unfair. This is something, the crony capitalism article also acknowledges when it says that Chinese e-commerce giant Alibaba is protected by the state from foreign competition, and that Alphabet/Google has become one of the biggest lobbyists in Washington and, along with another new-age firm Uber, is engaged in regulatory battles with various governments across the world. Were technology to be classified as a crony industry, the article concludes, ‘rent-seeking wealth would be higher and rising steadily in the Western world’. And given how billionaires in China rely on the party’s blessings, it adds, ‘were all billionaire wealth in China to be classified as rent-seeking, it would take the 5th spot in the ranking’. While it is important that countries like India do their utmost to reduce the level of government interference in the economy—that’s where rent-seeking comes from—it is ironic that The Economist should cite the rise of Flipkart as an instance of the changing India. Not only is the shine wearing off the e-commerce sector—in the last few months, Flipkart’s valuation has been marked down by 15-32% by various investors—most operate in a grey zone of illegality since the government did not allow foreign investment in the consumer segment which is where these e-tailers do their business; foreign investment has recently been allowed in this segment, but it has to be seen how fast these e-tailers will grow if they conform to the caveats put in the new policy.