“Our forex reserves may be growing rapidly but our moral reserves are at 1991 lows” said someone at the lunch table of a roundtable event of a prestigious policy think-tank. It was yet another Sunil Gavaskar style preachy cricket commentary outburst on corruption, dwindling moral values and rampant cronyism in modern day India. With my head down, staring at the Andhra spinach gravy on my lunch plate, I blurted – “but data does not support the claim that cronyism is on the rise; to the contrary, there is enough statistical evidence of Schumpterian style creative destruction”. As soon as these words left my mouth, Simon & Garfunkel’s lyrics “All my words come back to me….in shades of mediocrity” encircled my head!
Daunted but unfazed at the condescending stares of the six people at the table, all of who are established, intellectual elites with recognizable last names, I continued – “without being didactic, if one delves deeper beyond newspaper headlines and television rhetoric and attempts an analytical exercise to determine if crony capitalism is rampant and increasing alarmingly, there seems to be little evidence to this assertion”. The intensity of the stares increased and one taunted, “I have a formal training in econometrics, go on and explain your analysis”. This was the half volley I was waiting for.
I launched on my discourse:
“Let’s start with the premise that the capital markets are a good proxy indicator of wealth creation in India just as it is in the traditional Anglo Saxon economies. Crony capitalism in its polite form is “managed capitalism” and in its gory avatar is “nexus capitalism”. If crony capitalism is on the rise, then either existing companies would get bigger (managed capitalism) or companies with a “comparative advantage of connections and nexus” alone will succeed. Thus we can formulate our analysis to study the rate of change of constituents of the BSE-100 and BSE Sensex and glean key takeaways from this study.
Of course, the alternative hypothesis to the rising crony capitalism hypothesis is one of Schumpeterian creative destruction which postulates that in an environment conducive to entrepreneurship, newer companies will constantly displace older companies through innovation in free markets. Thus, Schumpeterian theory is the anti-thesis of crony capitalism as long as these new companies’ success is not largely and solely by virtue of their “connections”.
I looked at the BSE 100 constituents starting from 1986 and calculated the rate of change of this index in terms of constituents. I used 5 broad categories to classify companies:
A: Public Sector – State owned
B: Entrepreneur – Classic Schumpeterian type private enterprise with no unfair advantage in terms of access or nexus
C: Legacy – Companies that have had the benefit of just being around for a long time
D: MNC – Multinational companies in India that have an advantage of superior technological know-how
E: Resources – Companies that operate in state-owned resource sectors such as real estate, minerals, bank licenses, spectrum grants etc. Classic cronyism cases.
There were merely 5 replacements in the Sensex constituents of 30 companies from 1980-1995 vis-a-vis 45 replacementsin the next 15 year period ’95-’09. 70% of these replacements were Entrepreneurial companies displacing Legacy businesses. If we look at data in the broader BSE-100 index of 100 constituents, there were 205 replacements in the last 25 years, of which nearly 170 replacements were in the post 1995 period. 60% of these replacements were Entrepreneur or Public Sector companies displacing Legacy companies. Only 22 out of the 205 (~10%) additions fall under the category of Resources companies.
So, at least this first attempt at a statistical analysis of the rising crony capitalism claim does not lend credence to that claim. If any, the analysis clearly shows that “unadulterated” entrepreneurship has flourished in the post reforms era and has successfully displaced legacy businesses.” I finished my rendition.
Amidst raised eyebrows and shaking heads galore, one editor of a leading business newspaper said, “Food for thought, indeed”, in an obvious pun on this lunch table discussion. And then the rejoinders came fast and furious:
– “But in the last 4-5 years, cronyism has started to rise and your analysis compares broad 15 year periods”
– “degree of conglomeritization has increased in the last 5 years and how do you explain that”
– “your categorization of companies classified as true blue entrepreneurs and those that strive on nexus may be erroneous”
– “but how is it then that every wise man is hollering about rampant cronyism and Forbes billionaire list proves that”
I offered to share my raw data used for the analysis and mused, “Well, at least my argument wasn’t dismissed with disdain…wonder how much of the media noise created around some scandals may have sub-consciously led all of us to draw alarming conclusions about the state of development of this country….if only there was a way to mute out media noise and answer the larger question analytically. Is our development model fraught with the danger of going the oligarchic Russian way or barring some bad apples are we much better off now than we were a decade ago?”
(The author is a financial services professional of repute and a public policy activist. Currently on assignment with the Unique Identity Authority, Planning Commission and was the Managing Director of BNP Paribas Securities prior. Views are entirely personal.)