Can India ever see an end to crony capitalism? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Can India ever see an end to crony capitalism? 

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In this issue:
» Wall Street bonuses are on the rise
» Marc Faber's views on China
» Infosys is frustrated with government projects
» SBI's solution to bring down NPAs
» ...and more!


00:00
 
In recent years, although various economies around the world especially emerging countries have gained riches, this has been concentrated in the hands of a few people rather than benefitting the entire country. Indeed, cries of income inequality have become louder by the day. And billionaire lists published by magazines only underlines this widening income gap. Now the reasons for this have been plenty. But one of the reasons attributed to such wealth concentration has been 'crony capitalism'.

As per Wikipedia, crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism. The Economist has also coined another term called 'rent seeking', which is a special type of money making made possible by political connections.

Crony capitalism is not a new phenomenon but has prevailed since quite some time and that too across nations. The emerging countries, particularly have seen instances of rent seeking rise in the last quarter of the century. For instance, surge in property prices have made developers rich especially those who rely on approvals for projects. Rent seeking has also been rampant in the commodities sector. The boom in commodities has fuelled the value of mines and oilfields and these sectors are ones where there is considerable government intervention. In China especially crony capitalism is quite visible given that one third of the billionaires in the country are party members.

Crony capitalism has reared its ugly head in the developed world too especially since the 2008 global financial crisis. This has been quite apparent in the banking and financial services sector, which having burnt their fingers badly in the crisis, turned to the government to bail them out.

India too is no stranger to crony capitalism. Rent seeking in the country is especially prevalent in sectors such as real estate, energy, mining to name a few. Not only is corruption high in these industries but there are vested interests for companies operating in these sectors as well. What more, it is hardly surprising that the level of corporate governance and transparency in these areas especially real estate is pathetic to say the least.

Is there any reason to believe that crony capitalism is on the wane? We are not sure. However, the tolerance for the rising inequality is coming down. At a time when many countries are battling an economic slowdown, the need to fuel growth through effective implementation of reforms has become vital. The revolutions seen in many of the emerging countries also highlight the growing intolerance for an ineffective government. Moreover, investors are becoming more aware of the need of investing in businesses where corporate governance and transparency rate high. Hence, instances of crony capitalism in these times would come under scrutiny like never before.

In India, eliminating crony capitalism entirely is not something that will happen overnight. But there are hopes that the coming general elections and a new government at the helm would go a long way in reversing the apathy that was displayed by the current UPA government. At least, we certainly hope so.

Do you think that crony capitalism can be entirely eliminated in India? Will a new government make a difference in terms of reducing the unhealthy connection between politicians and businesses? Share your views in the in the Equitymaster Club. Or post your comments below.

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01:26  Chart of the day
 
2006 and 2007 were heady days for Wall Street especially for securities firms and investment banks. With so much money raked in, the bonuses doled out also shot up. Things took a drastic turn for the worse in 2008. As the global financial crisis hit financial firms and banks hard, bonuses also went for a toss. Moreover the blatant greed displayed by these companies meant that bonuses and fee structure came under intense scrutiny. Not surprisingly the period since then has seen bonuses remain stagnant although the last three years have seen a gradual rise in the same.

Wall St. bonuses: Catching up with pre-crisis levels?


02:01
 
One country's imports are another country's exports. And if there is a discrepancy between the two, which country should one necessarily trust? Well, Gloom, Boom and Doom editor Marc Faber faced such dilemma recently between Chinese exports and the imports from China that its trading partners were reporting. And it was not difficult for him to conclude that it is the data of the trading partner one should trust. In other words, China seems to be cooking up its numbers as per Faber and therefore the situation there is much more alarming than what's being presented.

So what happens when the whole thing unwinds? It will be nothing short of a disaster adds Faber. He is of the view that the Chinese economy is more important to other emerging economies than the US because China is a large importer of resources. Therefore, when China slows down, a lot of other emerging market countries could possibly face a recession. This is certainly true we reckon. However, all of this could have a positive impact on India since India is a net importer of commodities. And lower commodity prices could mean improved trade balances and lower inflation and ultimately lower interest rates in our view.

02:36
 
In the course of our research work, whenever we meet company managements there is widespread discontent as far as government projects are concerned. It is usually a given that bureaucracy and inefficiencies come as a free package with most government projects. Now it is none other than IT major Infosys that has expressed its discontent regarding government projects. As per an article in Business Standard, vice-president and head of India business unit has said that many government projects tend to be very frustrating and that the company is now reconsidering its future strategy in India.

It is worth noting that Infosys started focusing on the domestic market only 2008 onwards. Of its total domestic business, government projects account for a hefty 85%. Going forward, the company plans to be very selective with government projects. It will focus more on the private sector and aims to increase share of the private sector in domestic business from 15% to 70% over the next couple of years.

03:03
 
That bad loans have played a spoilsport for PSU banks is nothing new to us. But if this problem isn't nipped in the bud, it might get totally out of hand. Realizing this, country's largest lender has decided to sell its bad loans to asset reconstruction companies (ARCs). ARCs have been used world-wide to resolve bad loan problems. And State Bank of India (SBI) is all set to clean its balance sheet. The bank had reported as high as 6% non-performing assets (NPAs) for the December quarter 2013. In value terms, it amounts to as much as Rs 67,799 cr. And that's indeed a number to worry! Therefore the bank has announced that around Rs 5,000 cr of its Rs 67,799 cr would be sold to ARCs by the month-end. Notably, start April the banks have to comply with tighter provisioning norms for restructured assets. Thus SBI's move comes at the opportune time.

With the whopping NPAs on its books, SBI's profitability was seen down by 34% for the quarter gone by. Provisioning costs of Rs 3,429 cr dragged the earnings of the bank. Moreover slippages to the tune of Rs 11,400 cr added to the woes. That's not all! The bank is expecting another Rs 9,500 cr of restructured loans in the next quarter. Therefore, for the first time in its history, the bank has decided to take the ARC route. The country's largest lender is leaving no stone unturned to combat the bad loan crisis. However NPA problem is a tight rope to walk.

03:37
 
If 10 workers work for 40 hours a week, the total number of hours put in by them would be 400. Now, if the number of workers is increased to 15, but work for 25 hours a week, the total number of hours worked would be 375. As such, there is a decline in real output on account of lesser number of hours worked. This essentially seems to be the situation in the US right now. As pointed out by Stanford University Professor, Edward Lazear, the average work week has declined by a little less than 1% over the past few months in the US. This when combined with slower job creation, indicates that total hours of employment have dropped. Moneynews.com wrote 'Although employers added 900,000 jobs since September, the shorter workweek is like losing a million jobs. In other words, it's equal to losing 100,000 jobs.'

Whether this is a short term blip (on account of adverse weather conditions) or a long term trend that one must be worried about, is difficult to gauge. While it may seem that unemployment levels have been on a decline in the US - the country added 175,000 new jobs in the month of February 2014 - the actual picture does seem to be quite different. Not to mention that there have been reports of lower unemployment levels occurring due to people exiting the job market altogether.

04:12
 
Real estate prices across the board have hardly shown enough signs of correction over the past two years. Despite the stressed financial of even large developers, and build up of inventory, prices continue to remain beyond the reach of common man. To add to that, steep interest costs have also rendered the prospect of buying a home with loan almost unthinkable. Needless to say that with income stream remaining vulnerable and cost of living going up, potential home buyers have deferred their purchase decision.

They would rather pay a little higher for good rental accommodations. And it appears that such decisions have stoked the rental rates in metro regions. As per Hindu Businessline, the metro real estate rental rates have seen a spike over the past few months. And if the economic volatility and firmness in interest rates continue, the demand for rental properties may go higher. Also, while property markets have been dull due to speculators staying away, the rental market has no speculation. Having said that, thanks to the steep property prices, rental yields in India remains one of the lowest in Asia.

04:45
 
In the meanwhile Indian stock markets pared early gains but remained positive. At the time of writing, the benchmark BSE Sensex was up by 18 points (+0.1%). Energy and FMCG stocks were the biggest gainers. Majority of the Asian stock markets were trading positive led by Japan and Hong Kong. Most of the European indices opened the day in the red.

04:56  Today's investing mantra
"As in roulette, same is true of the stock trader, who will find that the expense of trading weights the dice heavily against him." - Benjamin Graham
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9 Responses to "Can India ever see an end to crony capitalism?"

KD

Mar 24, 2014

Anti business sentiment is neither good for stock market nor for country. Look at the states like Kerala and West Bengal. These states are not business friendly. Kerala has maximum literacy rate of 99%. Still it is poorest state in India. If you advertise a job then you will receive hundreds of resume from the people who belongs to Kerala.

Now look at the states like Punjab and Gujarat. These states have very high illiterate population. Still these states are among the richest states in India. In fact, maximum amount of Mercedes, BMWs and other high end luxury goods are sold in Punjab. The reason being, these states are pro business and entrepreneurship flourishes in these states.

Like 

Gangadharan Nair

Mar 19, 2014

In Indian Democracy, Crony Capitalism is a part and parcel of the system.The BLATANT PROOF is selection of Rajya Sabha Members and Legislative Council Members in the States. These two groups are very powerful but NOT being elected. They are all NOMINATED by the politicians of the country. As long as this system of NOMINATION continues nobody can eliminate CRONY CAPITALISM.

Like 

Chattree Atul

Mar 19, 2014

If India needs to come out from the clutches of crony capitalism need is of strong will and action.Tax system
need to be simplified and strictly implemented.Evaders need to be made accountable for their lapses.Political
interference wether be industry,judiciary&even sports should be done away with.How shall one explain with the fact that India has rising number of millionaires and also rising numbers of poor.Can any one explain the rising number of unsold properties across various cities?.Similarly is the state of commodities while the middleman &forward trader make money its the farmer&consumer that bear the brunt.This leaves the commen man who works for a living with neither home to live nor a square meal to eat.Also the health of the currency is affected due to inflation fuelled because of such reasons reducing the purchasing power&making other currencies costlier.On the whole such type of capitalism affects the whole society as a cancer which
needs to be cured for nations economic well being.
Chattree Atul

Like 

Dr Mahesh Agnihotri

Mar 18, 2014

No way crony capitalism will end. it has been in existence in since ages.we are almost heading towards a state of economy, where corruption is the order of the day. At this rate , the gap between the richer and the not so rich is widening and the number of billionaires is also increasing. if a patriot loves his country, he will not make money by unfair means. now there is a need to redefine corruption.
unless there is a big revolution India will continue suffer crony capitalism. only God can save India.

Like 

Gopal Kalpathi

Mar 18, 2014

Crony capitalism is no where to go. It has to remain and it will. I do not believe that BJP, as a party, which hopes to win to make a govt. at the center, is any cleaner than Congress. As far as AAP is concerned, they should rather sit in the opposition and help the people to know what is happening inside, rather than take the mantle in their hand, no matter what other (power and mischief mongering parties may say or do to them).

We have to put with these corr upt lot for some more time till there is a grass-root change happens with in the parties.

Like 

Krishna Navalli

Mar 18, 2014

Best any one could hope is to minimise these ills!

Like 

Philip

Mar 18, 2014

Never, as the ruling elites & their preferred group will get an opportunity to use power for own interests to grow big at cost of the society. That is why people are after politics and adopt any dirty trick to get into power as politicians, bureaucrats and the like.

Like 

Swapnil Gangele

Mar 18, 2014

As the transparency increases we start understanding all these what exists at upper level and so its not that crony capitalism is started reducing after all awareness yes it definitely started changing its shape size and now may be covered in some other Wikipedia undefined terminology all superficial efforts like change in governance, transparency could give some illusion of temporary reduction in it but real change could be derive through value based leadership which is the need of the hour.

Like 

sandip

Mar 18, 2014

the present govt has become shameless and fearless.
thats why they are doing scams of proportion never imagined in india. they have plundered more money in 10 yrs than the british did in 100 yrs. we hope the new bjp govt with very good administrators, nationalist and forward thinking leaders will put country first and put the train of progress back on track

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