This article deals with ‘Crony Capitalism.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
What is Crony Capitalism?
Crony Capitalism is an economic system in which businessmen thrives not by their hardwork or risk taking capacity but through a nexus between a business class and the political class.
Examples of Crony-Capitalism
- After close election victories, contractors affiliated to the winning politician are more likely to be awarded road projects. Around 26% of the roads listed as completed in Pradhan Mantri Gram Sadak Yojana were missing from 2011 Census Data, suggesting they were never actually built
- Public Sector Bank was more likely to approve loan application of a company if owner gave election donation to the ruling party.
- Political connections play a role in the allocation of bank loans to Chinese firms.
Why Crony Capitalism is bad ?
- Pro-Crony Policies leads to wealth destruction :
- On one hand , Liberalization of Indian economy enabled creative destruction of inefficient companies by empowering markets. Creative destruction in turn enables wealth creation by allowing entry of new firms leading to increased competition and lowered prices for consumers.
- But on other hand, Pro-Crony policies of government leads to wealth destruction as cronyism fosters inefficiencies by inhibiting the process of creative destruction.
- Cronyism leads to rent seeking behavior
- In crony-capitalism, customer is the ultimate loser as bribes paid by the industrialists are extracted from the customers .
- Crony Capitalism leads to Discretionary Allocation of Natural Resources
- This can be shown using example of coal. Prior to 1993, no specific criteria for allocation of captive mines existed. Allocation was done via Committee in which committee used to decide allocation to private firms. Firms that got the free resource diverted efforts towards the tunneling of the windfall gain instead of towards productive business activity. Currently, the coal mines allocation is governed by Coal Mines (Special Provisions) Act, 2015 which ensures that any future allocation of coal blocks would solely be through competitive auctions
- Crony Capitalism leads to Willful Defaults
- RBI defines a willful defaulter as a firm that has defaulted in meeting its repayment obligations even though it has the capacity to honour these obligations. Due to Crony Capitalism, Willful Defaulters are not given strict treatment . Such incidents have destroyed total of Rs 1.4 lakh crore from bank’s assets.