Big government means more crony capitalism

A recent issue of The Economist says that big corporations are back in favour. For obvious reasons. Periods of economic turbulence tend to take a toll of the small whereas the big are helped out by politicians. Dinosaurs like GM or Citicorp are deemed too big to fail. The little startups in Silicon Valley or Boston are free to go belly-up when venture capitalists play Scrooge and banks yank the credit carpet from under them. Adversity also creates in companies the urge to merge. Lenders like to lend only to companies that can’t fail. Big looks beautiful.

There is, however, a stronger connection we need to make: big corporations thrive in the shadow of big government. During the Reagan years and after, lasting well upto the final years of George W Bush’s presidency, the dominant economic ideology was small government. We saw huge deregulatory moves and one biggie after another bit the dust. Established giants faltered (AT&T, GE, Coke, the big airline companies) and even near-monopolies faced serious challenges to their dominance: Microsoft from Google, GM and Ford from Toyota, the giant software services firms from offshore champs like Infosys.

Today, due to the global meltdown, governments are spending (or have already spent) more than US$5 trillion (that’s five times the size of the Indian GDP) to ward off a Great Depression. Big corporations are back because big government is. But this, too, shall pass. The current preference for bigness will start waning as soon as government spending starts shrinking — as it surely must — and the markets start placing a premium on economic efficiency rather than just size.

In India, however, we may have no such luck. We have always had big government and, therefore, giant business houses. In the pre-reform years, socialists of various hues railed against them, but not one of them vanished. Only in the post-reform period have some been cut to size (the Mafatlals come to mind). Ideally, we should have seen a shift in economic power away from big to efficient after the 1990s. But after a few halting moves in that direction— when companies divested and started focusing on the core—we have returned to glorify size. This is primarily because government has never stopped bloating.

In his current avatar as PM, Manmohan Singh, architect of the initial reforms involving delicensing, deregulation and downsizing, has presided over the largest expansion of government spending in living memory. In the current fiscal year (2009-10), government will borrow more than Rs400,000 crore (probably Rs500,000 crore, if you consider off-budget items like oil bonds), a figure that’s larger than the entire central expenditure for 2004-05, the first year of the UPA.

Large government is invariably accompanied by crony capitalism. Reason: when government spends more, private companies do more business with it. This is true whether the spending is in the form of rural doles like NREGA or urban infrastructure or petroleum subsidies. In the high-cost and venal political system we have created, government business almost always means corruption. To benefit from it, you have to be a crony capitalist, a friend of politicians.

In recent weeks, government has come close to implicitly admitting that some businessmen carry a lot of clout with it. In the Ambani gas war, the petroleum ministry revised its petition before the Supreme Court by steering clear of challenging the memorandum of understanding (MoU) between Mukesh and Anil Ambani on a division of assets.

Earlier, the government had targeted this private agreement between the brothers (the MoU), opening itself to the charge that it was helping one brother against the other. It is one thing to claim you own all the gas in India, quite another to say two private individuals cannot reach an agreement between themselves.

But this belated wisdom notwithstanding, there is no denying the extent of crony capitalism in India. From the centre to the states, businessmen spend crores of rupees to align themselves with politicians. Politicians ranging from Sharad Pawar to Murli Deora to Mulayam Singh, from Narendra Modi to the late YS Rajasekhara Reddy, everyone of them has been linked to businessmen in the business media. More often than not, it involves land dealings — for this is the new currency of politico-economic power — but there is no doubt that business success needs political support.

Big government is a big part of the reason. We need to start downsizing it.

This means not only more reforms and less discretionary government controls, but more transparent rules. Ultimately, it should mean fewer government employees. At last count, we had more than 3.3 million central government employees, excluding defence personnel. The states have even more. Do we need so many people living off our taxes?