Crony capitalism and India’s political system

Abstract

The following quote by Raghuram Rajan (2014), governor of the Reserve Bank of India, captures the main thesis of this chapter and the connection between politics and crony capitalism in the Indian context: The crooked politician needs the businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the crooked politician to get public resources and contracts cheaply. And the politician needs the votes of the poor and the underprivileged. Every constituency is tied to the other in a cycle of dependence, which ensures that the status quo prevails.

Crony capitalism is a system under which business profitability hinges considerably on the ability to maintain strong relationships with bureaucrats and politicians. Money typically lubricates these relationships. The incentive for businessmen to invest in relational capital is that bureaucrats and politicians may be in a position to grant specific regulatory favors or monetizable benefits that give them a competitive edge over others. Since governments the world over exercise regulatory functions, taxing authority, allocation of subsidies and transfer payments, Tullock (1967) argues that the business class in general will always have an incentive to devote resources to go about acquiring favorable treatment, triggering corruption and crony capitalism.