Economy

Lessons from Tuticorin: Official Policies in India Are Pro-Business, Not Pro-Market

We are far away from establishing a fair and rule-based free-market capitalistic system. What happened in Tuticorin is perhaps a grim reminder of this.

The people of Tuticorin have been protesting against Vedanta’s Sterlite copper unit for its adverse impact on the environment for quite some time. This protest took a bloody turn recently when 13 protestors died tragically when the police fired on the crowd.

Since then, as reported, allegations and counter allegations have been made that the UPA government or the current NDA government (or both) interpreted environmental regulations in a manner that allowed Vedanta to operate and expand the copper plant without holding public consultations.

In 2016, the National Green Tribunal struck down orders issued by the NDA government in December 2014 that gave companies like Vedanta a free pass.

Then on May 23, 2018 – just a day after the police firing and bloodbath – the Madras high court ordered the Vedanta Group to stop the expansion of its copper unit. Finally, on May 28, 2018, the Tamil Nadu government ordered the permanent closure of the plant. Whether this closure order will stand legal scrutiny in a court of law isn’t known yet.

Apart from these legal complexities, however, this case also provides an opportunity to revisit the relationship between governments and businesses in India.

Crony capitalism

In their book, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, William Baumol, Robert Litan and Carl Schramm talk about four distinct types of capitalism: state-guided capitalism, oligarchic capitalism, big firm capitalism and entrepreneurial capitalism.

Out of these, oligarchic capitalism, common in Russia and Latin America, is a particularly bad type of capitalism because the bulk of power and wealth is held by a small group of individuals and families. While there is no oligarchic capitalism in India yet, crony capitalism is prevalent. Thus, any discussion on the relationship between the government and businesses has to focus on cronyism. As Chiranjib Sen has argued, crony capitalism is nothing but a mild form of oligarchic capitalism.

As a ‘perverse manifestation of capitalism’, it refers to a business environment in which private entities and the government collude to rig the competitive rules or laws of market economy to favour the colluding private entities, often in exchange for money or other such considerations. In plain terms, it is corruption.

In the history of independent India, the roots of crony capitalism can be traced back to the pre-1991 era of the license, permit and quota raj when the government tightly controlled most economic activities. Due to these stifling controls, this era provided many opportunities for collusion between the government and businesses.

As Paranjoy Guha Thakurta has lucidly written, during the heyday of Indian socialism, “Indian politicians were known to curry favour with businessmen – licences and permits would be farmed out in return for handsome donations during election campaigns.”

Some business houses were quite happy to oblige governments in return for favourable policies that expanded their markets and narrowed competition. A popular image that symbolises the cosy relationship between government and business in those days is when Indira Gandhi returned to power in 1980, Dhirubhai Ambani shared a platform with her at a victory rally.

Indira Gandhi and Dhirubhai Ambani in an undated photograph. Credit: Frontline

The fact that businesses like to indulge in anti-competitive practices to expand their profit at the cost of society was recognised long ago by none other than Adam Smith. In The Wealth of Nations, he wrote that dealers are always interested in narrowing the competition. Narrowing competition helps the dealers to raise their profits above what they naturally would be, which hurts public interest.

Likewise, Raghuram Rajan and Luigi Zingales, argue in Saving Capitalism from the Capitalists that “throughout its history, the free market system has been held back, not so much by its own economic deficiencies, as Marxists would have it, but because of its reliance on political goodwill for its infrastructure”.

The biggest threat to free-market capitalism comes from the capitalists themselves – the incumbents – those who have already established their dominance in the market and would like to retain this dominant position. Incumbents often try to retain their dominant position by colluding with the government or other instrumentalities of the state to rig the market structure so that the playing field remains unlevelled and markets remain uncompetitive.

This collusion with the state can take different forms, including appeasing and openly supporting the political party in power or the policies of the government of the day by issuing advertisements in newspapers. As a result, Rajan and Zingales argue that despite “capitalism, or more precisely, the free-market system being the most effective way to organise production and distribution that human beings have found”, it has made unexpectedly few inroads into the hearts and minds of people.

As Rafael Di Tella and Robert MacCulloch show, public support for capitalism in any given country is negatively correlated with perceptions of corruption. Support for free-market capitalism depends on whether common people believe that acquisition of wealth is an outcome of hard work, efficiency and innovative ideas or an outcome of corruption, luck or the right political connections. If it is the latter, then people at large will continue to remain skeptical of free markets.

However, if everyone believes that they too can become a Steve Jobs or a Narayan Murthy through hard work, entrepreneurship and talent, support for free-market capitalism would grow.   

The 1991 economic refroms     

The liberalisation of the Indian economy in 1991 brought about a change in India’s political economy because many state controls on pricing, investment, production and international trade in goods were lifted. Removal of these controls meant it was no longer necessary for businesses to grease the palms of officials to conduct their operations. The 1991 economic reforms have been successful in reducing poverty at a faster rate than the pre-1991 period, as C. Rangarajan and Mahendra Dev have argued.

An important pivot of the 1991 economic reforms was to redefine the relationship between government and business by not just freeing markets but also by creating a rule-based approach to economic governance implemented by independent regulators. To some extent, these reforms were successful.

Post 1991, many regulators have come into existence such as the Securities and Exchange Board of India, the Competition Commission of India and the recently formed Insolvency and Bankruptcy Board of India. New laws like the Competition Act and Foreign Exchange Management Act (FEMA) were enacted, replacing draconian legislations like the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA) respectively.

Notwithstanding these reforms, other crucial  governance, administrative and institutional reforms have not been carried out. The failure to clean up electoral funding, with corporate donations constituting the main source, is a case in point. The recent attempts by the government to clean up electoral funding are nothing more than window dressing. In simpler terms, corporate groups fund election campaigns of political parties to curry favour with these parties once they win elections. Electoral funding has thus become a prominent source of crony capitalism in India.   

Moreover, despite liberalisation of the Indian economy, the state continues to exercise control over many things including land, finance and banking, minerals and other natural resources. Due to this control, the unholy nexus between government and business continues and often manifests itself in various corruption scandals. Allegations of corruption in allocation of telecom and spectrum licenses, coal blocks, acquisition of land for industrial projects etc point to the unholy nexus that continues to exist between governments and business.

No wonder, the Economist magazine, in 2016, ranked India ninth in its global crony capitalism index, with crony sector wealth accounting for a whopping 3.4% of India’s GDP.  

Pro-business vs pro-market

For India to move away from crony capitalism, it needs to shift from a ‘pro-business’ orientation towards a ‘pro-market’ approach.

In common parlance, the pro-business orientation of a government is confused with a pro-market approach. In reality, these two concepts are quite different. Being pro-business means promoting and protecting the fortunes of existing businesses at the cost of new entrants.

On the other hand, being pro-market means fostering truly and freely competitive markets with a level playing field for everyone.

For example, the government allotting land at concessional rates to established business houses, or giving tax holidays to certain industries in the name of stimulating investment are examples of being pro-business, not pro-market.

A pro-market orientation means the government maintaining equidistance from all businesses, creating a level playing field, establishing the rules of the game including an effective and independent legal and regulatory framework, providing the right physical infrastructure and business environment, and then letting the market function efficiently with minimum interventions.

The beauty of free and competitive markets is that they require even established businesses to prove their competence again and again in the marketplace. This compels everyone, including well-known firms, to continuously invent and strive to improve their efficiency. No one can take their success for granted or rest on past laurels. Open competition, in turn, leads to better products, improved services, greater innovation and improved overall economic efficiency.

However, established market players, especially those who have acquired prominence by managing the system well, usually don’t like competition. Such firms often flex their muscles and lobby with the state to limit competition or change rules/policies in a manner that keeps the playing field unlevelled in their favour. Governments and institutions not bound by constitutional morality often succumb to such lobbying.

In the case of India, Arvind Subramanian and Dani Rodrik have argued that in the 1980s, India followed a pro-business approach. Indira Gandhi, who had returned to power in 1980s, “was far less interested in opening up the economy and removing impediments to competition than in garnering political support from existing business groups”. As a result, existing businesses benefited immensely, creating an ecosystem that was unwelcoming of new entrepreneurs.  

The premise of the 1991 economic reforms was an attitudinal shift from a pro-business to a pro-market orientation. The 1991 reforms, to some extent, have democratised the markets by creating an ecosystem where new entrants have amassed wealth or have become professionally successful without being born in established business families or without any government support. The information technology (IT) industry is an excellent example of this.

The formation of bodies like the Dalit Indian Chambers of Commerce and Industry (DICCI) in 2005 and the rise of Dalit entrepreneurs post 1990s (unthinkable in the pre-1991 era) is further proof of the democratisation potential of markets in India.

Despite these successes, the Indian state continues to exhibit a pro-business approach with cronyism writ large.

Summing up

If all economic systems are imperfect, capitalism may well be the least imperfect of all these systems. As Allan H. Meltzer, has argued, capitalism has an remarkable ability to adapt to varying morals, ideals and cultures. No wonder we have a Swedish version of capitalism that is different from the American version of capitalism, which, in turn, is different from Japanese capitalism. The 1991 economic reforms in India were a promising start towards establishing a fair and rule-based free-market capitalistic system. However, despite some successes, we are yet to get anywhere closer to the goal.

What happened in Tuticorin is perhaps a grim reminder of this. It shows that as regards the relationship between governments and business, the more the things change, the more they remain the same.

Police personnel baton charge at a protestor demanding the closure of Vedanta's Sterlite Copper unit, in Thoothukudi. Credit: PTI

Police personnel baton charge at a protestor demanding the closure of Vedanta’s Sterlite Copper unit, in Thoothukudi. Credit: PTI

India needs capitalism based on fair competition and equality of opportunity to all – a core constitutional value written in the preamble of the Indian constitution. Free-market capitalism will inevitably lead to unequal outcomes. However, unequal outcomes are not unfair outcomes provided everyone trusts that the winner is not playing with loaded dice.

Crony capitalism is an anathema to basic constitutional values of fairness, equality and rule of law. At a time, when income inequality in India is extremely high, the perception that the system is rigged in favour of a few has dented the credibility of India’s bold experimentation with the markets.

In order to restore the confidence of the people, as Raghuram Rajan, borrowing from American political scientist Francis Fukuyama, has argued, the edifice of the Indian Republic needs to stand on four pillars: a strong government (efficient and fair administration that provides access to quality public/social goods including health and education); democratic accountability; rule of law (independent institutions and laws that impose limits on the state’s exercise of public power and comes down heavily on anyone who cheats on the system); and free-markets (providing equality of opportunity for economic empowerment to all citizens based on skill and hard work, not patronage, political or otherwise).

This is not a utopian dream. It can be realised provided there is a strong political will and visionary leadership at all levels.  

Prabhash Ranjan is an Assistant Professor of Law at the South Asian University. Views are personal.