Dear govt, can we have some real liberalisation?

Consider the top companies in India by market capital — Tata Consultancy Services, Reliance, HDFC Bank, Hindustan Unilever, ITC, SBI. Consider the same list in the US — Apple, Alphabet (Google), Microsoft, Facebook, Amazon, Berkshire Hathaway. Is there a pattern in the respective groups?

Here’s the difference. Almost every company in the US has made it big without any government contract or service. And almost no company in India is big without government purchase orders (indeed, even TCS’s revenue is significantly contributed to by government contracts). This stark difference is repeated across the developed and developing countries. In the former, you need skills and merit to grow big. In poor countries, you need government patronage.

Couple this piece of information now with something else. How much did political parties spend during the Lok Sabha election in 2014 on campaign alone? A whopping $5 billion, close to what Donald Trump and Hillary Clinton together spent on their campaigns!). A $5 billion spending when the per capita income in India is around $1,600. That is equivalent to the annual salaries of 20 crore Indians. Why such huge spending on election campaigns in a country where two lakh people die a year for lack of access to safe drinking water?

Because government controls all the resources. So, for rich Indians and corporates, it is totally worth their while to give money to political parties. In fact, a lot of money. The election victory of a favoured candidate means contracts worth millions and billions. Surely, companies in India need government to flourish.

Douglas North, the Nobel Prize winner in Economics in 1993, in his co-authored 2010 book, Violence and Social Orders divides the world into ‘open access’ and ‘limited order’ societies. In the open access order, everyone has access to economic surplus based on well-defined rules of merit and lawfulness. In limited access societies, only the elites have access to that pie.

A handful of government, military and corporate elites control everything and give away very little to ensure that there is no unrest. Your success depends on how close you are to the elites.

In India, your access to resources, in general, necessitates access to government. In the US, Jeff Bezos can criticise Trump publicly and Trump can hit back. But this only leads to a tiny drop in Amazon’s market capital. Imagine some of the richest Indian corporate houses coming out openly against Modi. Hardly likely! Indeed, they have not. Only small traders have, because they are also the worst sufferers.

Talk to some entrepreneurs and you will be amazed at how gargantuan the presence of the State is in this country. Manufacturing start-ups cannot flourish unless enabling institutions and supporting infrastructure are in place, both largely dominated by governments. And it is getting worse. Using archaic rules, bureaucrats still control a vast sector of the economy.

Elusive idea

Real liberalisation has not yet happened in India. Only the previous ‘Licence Raj’ has gone away, to some extent. The basic idea of free markets — that only merit and skills matter — remains elusive. The State has kept the resources unto itself and released them only to those who are its loyal elites. In this crony capitalism, rent-seeking has become the order of building capital for the most part, leaving a vast majority of Indians frustrated. That is why, despite the supposed crackdown on black money, Gallup polls show that merely 3% Indians feel that they are thriving today, compared to 14% in 2014.

And the government’s hold is only tightening. In fact, when the Nirav Modi fiasco happened in a public sector bank (PSB), the government’s response was to ban issuance of LoUs by all banks, including private banks. So, instead of putting the PSBs in order, it simply forced private banks also to fall in line, like PSBs. What logic! And worse, we know that the Nirav Modis of India will still get away.

Even today, a vast amount of government contracts come with impenetrable eligibility criteria. Those eligible to apply to secure a tiny government contract must have giant revenues, so that only the big firms can get the contract, and then outsource it to smaller firms.

Across sectors and industries, this is the standard way in which government contracts get done. In the US, small and mid-scale companies bid for local contracts by the government and win. This enhances their value and skills. The big companies in India hardly have reasons to innovate.

More than innovation, they simply need to stay close to the State. No wonder most foreign firms are scared to enter India because they lack the know-how to navigate the government. So, when they do, they invariably have an Indian partner.

Tata takes care of Starbucks, Singapore Airlines (in the form of Vistara) while Reliance has given refuge to Hamley’s, CNN (through Network 18), for instance. Surely, there are some Flipkart stories as well, but then occasional bursts of energy are natural in an economy of this size. But look at it closely, most of today’s corporate/start-up rising stars are upper caste, male, have gone to IITs/IIMs and focus their operations in big cities.

Centralisation is a recipe for disaster. The government needs to open itself up, shed its powers and give them away — to small firms, based on merit. That’s the only way to reverse this crony capitalism.

(The writer teaches Economics at OP Jindal Global University)