CRONY
CAPITALISM IN INDIA
Unholy Alliance
India’s
political-business nexus has evolved from petty rent-seeking into something
more corrosive: a structural fusion of state power and private capital that
threatens both market competition and democratic legitimacy.
THE
ANATOMY OF CAPTURE
CRONY CAPITALISM is an imprecise term. In India it describes something more
specific: a symbiotic relationship between politicians and industrialists in
which each provides what the other cannot obtain through legitimate means.
Politicians supply regulatory favours, public contracts and protection from
competition; industrialists supply election finance and the media access that
modern campaigns require. The arrangement is self-reinforcing and, by now,
deeply structural.
Its roots predate liberalisation. The “Licence
Permit Raj” of the post-independence decades institutionalised discretionary
state power over private investment. The 1991 reforms dismantled many of those
licences, but they did not dismantle the habits of mind that accompanied them.
Instead, they created new arenas for influence-peddling. Deregulation meant
that the state had fewer formal levers — but those it retained became more
valuable, and the competition to control them more intense.
The result has been a progressive concentration
of economic power. Data from Marcellus Investment Managers illustrate the
trajectory starkly.
|
Year |
Entities measured |
Share of total corporate profits |
|
1990 |
20 most profitable firms |
14% |
|
2010 |
20 most profitable firms |
30% |
|
2019 |
20 most profitable firms |
70% |
|
|
||
Source: Marcellus Investment
Managers
A five-fold increase in profit concentration
over three decades is not the signature of a competitive market. It is the
signature of a market progressively shaped by political proximity. The shift,
roughly, has been from oligopoly — several well-connected firms competing — to
something closer to monopoly, in which a handful of conglomerates are so
interwoven with state policy that distinguishing their interests from the
national interest has become genuinely difficult.
This matters beyond economics. Classical
liberal theory rests on equality of opportunity: the Aristotelian proposition
that like cases be treated alike. Crony capitalism violates this at the root,
substituting political proximity for merit as the primary determinant of
economic success. The consequence is not merely inefficiency. It is a
corruption of the legitimating principle on which both market economies and
democratic states depend.
A
TILTED PLAYING FIELD
The most visible mechanism of market distortion
is predatory pricing. A firm enjoying state-sanctioned advantages — subsidised
land acquisition, preferential spectrum allocation, regulatory exemptions — can
price below cost in ways that competitors without such subsidies cannot match.
The telecommunications sector offers the clearest illustration: a new entrant,
backed by vast conglomerate resources and an apparently benign regulatory
environment, compressed margins industry-wide, drove several rivals to insolvency,
and subsequently achieved the dominant market position that such a campaign
required.
Market consolidation is also pursued through
the strategic weakening of public-sector competitors. The managed decline of
BSNL and Air India — capital starvation, deferred investment, accumulated
losses — cleared space for private incumbents rather than subjecting them to
genuine competition. The pattern is consistent enough to suggest design rather
than coincidence.
The effects on the broader investment climate
are predictable. Foreign and domestic investors calibrate risk partly on the
predictability of the regulatory environment. When rules change at the behest
of favoured incumbents, that predictability collapses. Regulatory volatility of
this kind is not random; it is specifically targeted, which makes it more
damaging: companies cannot hedge against politically motivated rule changes the
way they can hedge against generic uncertainty.
“When rewards accrue to political connection
rather than innovation, the economy’s signal to its most talented participants
is: navigate, don’t create.”
The entrepreneurial consequences are serious.
India’s start-up ecosystem has grown impressively, but disproportionately in
sectors — software services, consumer internet — that sit outside the crony
economy’s traditional domains of infrastructure, natural resources and
financial services. The parts of the economy most shaped by political
allocation are the parts most hostile to new entrants and disruptive
innovation.
BORROWED
TROUBLE
Nowhere is the nexus more financially damaging
than in the banking system. The non-performing asset (NPA) crisis that has
periodically destabilised India’s public-sector banks is, in significant part,
a product of compelled lending: credit extended under political pressure to
borrowers whose creditworthiness was always in doubt. When those borrowers
default — sometimes deliberately, exploiting the implicit guarantee that
political connections provide — the losses fall ultimately on the public
exchequer.
The mechanism has a grim arithmetic.
Politically directed lending produces NPAs. NPAs weaken bank balance sheets.
Weak balance sheets require government recapitalisation. Between 2017 and 2021,
the Indian government injected over ₹3.5 lakh crore into public-sector banks.
That capital — roughly equivalent to India’s annual defence budget — was not
available for roads, schools or rural health infrastructure. It was
transferred, in effect, from the general taxpayer to the depositors of banks
whose losses were engineered by their largest borrowers.
The secondary casualty is the MSME sector,
which employs some 110m people and contributes around 30% of GDP. Weakened
banks, burned by large corporate exposures, become risk-averse across the
board. Small businesses, lacking collateral and political connections, bear the
brunt. They are denied credit by a crisis they did not cause, while the
entities that caused it receive public rescue capital. The distributional
injustice is as precise as it is consequential.
|
Mechanism |
Immediate effect |
Systemic consequence |
|
Politically compelled lending |
Rising NPA ratios |
Credit contraction economy-wide |
|
Bank recapitalisation from
exchequer |
Fiscal revenue diverted |
Public goods crowded out |
|
Risk aversion by weakened banks |
MSME credit denied |
Employment and GDP growth constrained |
|
|
||
Sources: RBI Annual Reports;
Ministry of Finance budget documents
THE
PRICE OF POLITICS
The financial logic of the nexus has a
political corollary. Modern electoral campaigns are expensive — India’s 2019
general election cost an estimated ₹55,000 crore, making it the most expensive
democratic contest in history. That money has to come from somewhere. It comes,
overwhelmingly, from the same business interests that benefit from political
favours. The cycle is circular and, as Raghuram Rajan, a former governor of the
Reserve Bank, has observed, self-sealing: the politician needs the businessman
for funds; the businessman needs the politician for access; neither can easily
exit.
The consequences for legislative composition
are direct. Some 34% of Lok Sabha members and 38% of Rajya Sabha members own
assets exceeding ₹10 crore. Parliament, formally a representative institution,
increasingly represents the interests of those wealthy enough to enter it or
fund those who do. Robert Michels called this tendency the “Iron Law of
Oligarchy”: whatever the formal ideology of a political organisation, power
tends to concentrate in a self-perpetuating elite. India’s experience is a
textbook illustration.
The opacity introduced by electoral bonds — a
mechanism that allowed large political donations to be made without public
disclosure of the donor’s identity — deepened the accountability deficit. The
Supreme Court’s 2024 ruling striking down the scheme was welcome, but the
underlying pressure to insulate political finance from scrutiny persists.
More insidious still is the concentration of
media ownership. When the same conglomerates that benefit from political access
own the major news channels and digital platforms, the information environment
that citizens rely upon to make electoral judgments is shaped by interests with
a stake in their not making them too clearly. Agenda-setting — keeping certain
questions off the table while elevating others — is a subtler instrument of
power than censorship, and harder to challenge.
TWO
NATIONS
The social consequences of concentrated
economic power are severe and increasingly visible. According to Oxfam, the top
10% of Indians hold 77.4% of national wealth; the bottom 60% hold 4.8%. These
are not the statistics of a country whose growth is broadly shared.
The pandemic made the divergence stark. While
the aggregate wealth of India’s wealthiest individuals grew substantially
through 2020, the majority of the population experienced income collapse,
reverse migration and food insecurity. The contrast was not incidental to the
structure of the economy; it was a direct expression of it.
Inequality of this magnitude eventually
undermines social cohesion. India’s pre-existing fractures — of caste, religion
and region — provide ready channels for economic grievance to become political
mobilisation. The caste-class nexus is particularly durable: upper-caste groups
are overrepresented in both the business and political elites, and the two
networks reinforce each other across generations. Economic reforms that do not
grapple with this structural reality will achieve redistribution on paper while
preserving hierarchy in practice.
“Formal constitutional rights mean little to
those whom material deprivation has already dispossessed of the capacity to
exercise them.”
The risk, ultimately, is of what one might call
a bifurcated nation: a globally integrated, English-speaking, urban elite on
one side, and a vast agrarian and informal-sector majority on the other,
connected to the formal economy primarily as labour and consumers rather than
as participants. That bifurcation does not make democracy impossible, but it
makes it susceptible to a particular kind of politics — one that offers
symbolic recognition in lieu of substantive redistribution.
WHAT
IS TO BE DONE
The prescription follows from the diagnosis. If
the nexus is structural, piecemeal interventions will be absorbed and
neutralised. Reform requires simultaneous action across regulation,
transparency, institutional autonomy and civil society.
On regulation: The primary objective should be to shrink the domain of
discretion. Transparent, digitally auditable approval processes for public
contracts and licences remove the human interface through which favours are
dispensed. Mandatory regulatory impact assessments — independent of the
executive — would test whether new rules entrench incumbents or genuinely
improve competition. Political party expenditure ceilings, applied to parties
rather than individual candidates, would reduce the demand for large donations
at source.
On transparency: Political parties should be brought within the ambit of
the Right to Information Act and subjected to mandatory independent audit. The
revelation that they are not currently so covered is itself an illustration of
the problem. Electoral finance should be fully disclosed in real time. The
judiciary’s demonstrated willingness to strike down opacity-enabling
mechanisms, as with electoral bonds, should be institutionally reinforced
rather than treated as episodic.
On institutional autonomy: The investigative and regulatory agencies whose mandate
includes policing the nexus — the CBI, the Enforcement Directorate, the
Comptroller and Auditor General — require appointment processes genuinely
insulated from executive control. The principle is simple: an agency whose
leadership is appointed by those it investigates is not, in any meaningful
sense, independent. Fixed, non-renewable terms and parliamentary confirmation
would help.
On the financial system: Credit allocation in public-sector banks must be separated
from political influence. This requires not only stronger governance at the
board level but a credible deterrent for willful defaulters, regardless of
their political connections. The current system, in which large defaults are
effectively subsidised by taxpayers while small borrowers are denied credit, is
both economically inefficient and politically corrosive.
■ Independent media must be protected from ownership
concentration and government pressure. Professional standards bodies with
genuine investigative capacity, and legal protections for journalists and
whistleblowers, are preconditions for the accountability journalism on which
all other reforms depend.
■ MSMEs, the backbone of employment, require a permanent
institutional voice in policy processes. Their interests are systematically
underrepresented relative to large conglomerates with dedicated lobbying
infrastructure.
■ Civil society — including opposition parties, academic
institutions and organised labour — must function as a sustained countervailing
force. The exposure of cronyism is not only a journalistic function; it
requires coordination across institutions.
India possesses genuine resources for this
project. Its constitutional tradition — the Directive Principles of State
Policy, the fundamental rights framework, the independent judiciary — provides
both the mandate and the mechanism for reform. The periodic reset of elections,
however imperfect, retains the capacity to discipline political actors who have
lost the public’s trust. And the country’s long tradition of civic engagement,
from the independence movement to the anti-corruption campaigns of the 2010s,
demonstrates that popular pressure can, at moments, override entrenched
interests.
None of this is automatic. The nexus is not a
conspiracy that can be dismantled by exposing it; it is a set of mutually
reinforcing incentives that can only be altered by changing the institutional
environment in which politicians and businesspeople operate. That is a longer
and harder task. But it is the right one. A democracy in which wealth is both
the prerequisite for political power and the prize of exercising it is a
democracy in name only. India’s ambitions — for sustained growth, for social
equity, for genuine great-power status — cannot be realised through a system
that systematically misallocates resources, degrades institutions and narrows
opportunity to those already inside the circle of power.
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