From crony socialism to stigmatised capitalism

IsIndia about to get its mojo back? As the country’s exports accelerateon the back of today’s synchronous global economic expansion, thenegative effects of the November 2016 demonetisation of high-value banknotes and the enactment last July of a new goods and services tax (GST)are receding. Provided that macroeconomic pressures from high oil pricesare contained, and sharp corrections to elevated asset prices aremanaged, India is poised to regain its status as the world’sfastest-growing major economy.But ongoing efforts by the governmentwill be key to reviving private investment and sustaining medium-termgrowth. Specifically, economic policymakers must address thelong-standing problem of over-indebted firms and under-capitalisedpublic-sector banks – the so-called “twin-balance-sheet problem.”Tothat end, many distressed companies have been forced to clean up theirbalance sheets under a new bankruptcy code that was adopted in December2016, and more companies are likely to follow suit this year. Meanwhile,the government has also announced a large recapitalisation package(about 1.2% of GDP) to shore up public-sector banks, so that they canwrite down their stressed assets.As these reforms take hold, Indianfirms should finally be able to resume spending, and banks will onceagain be able to lend to the critical but currently indebtedinfrastructure and manufacturing sectors. India’s economic reforms havetaken a long time to implement. But if they continue to be a success,they will provide valuable lessons for future leaders about the properrole of the private sector not just in India, but around the world.InIndia, the private sector – and capitalism generally – evokes feelingsof deep ambivalence. This is for good reason, given that India’s privatesector still bears the stigma of having been midwifed under thepre-1990s “License Raj” – an era remembered for its red tape andcorruption. To this day, some of India’s legendary entrepreneurs arebelieved to have built an empire simply by mastering the minutiae ofIndia’s tariff and tax codes, and then manipulating them brazenly totheir advantage.Some of the private sector’s stigma was cleansed bythe boom in information and communications technology that started inthe 1990s. The ICT sector had developed by virtue of its distance from,rather than proximity to, government. Indian ICT firms adopted exemplarygovernance standards, were listed on international stock exchanges, andthrived in the global marketplace. And, by extension, they improved thestanding of Indian capital.But after that era of good capitalism,the stigma returned. During the infrastructure boom of the mid-to-late2000s, public resources were captured under a “Rent Raj,” which putterrestrial rents (land and environmental permits), sub-terrestrialrents (coal), and even ethereal rents (spectrum) up for grabs. Moreover,the infrastructure investments of this period were funded by recklessand imprudent lending by public-sector banks, which often funnelledresources to high-risk, politically connected borrowers.As a result,the Indian public concluded that majority equity holders (“promoters”)had little skin in the game, and that “limited liability” really meantno liability at all. And now that rapid technological change isthreatening the ICT sector’s business model – providing low-costprogramming services to foreign clients – even India’s “cleanest”capitalist industry is confronting governance challenges.Morebroadly, one could say that India has moved from “crony socialism” to“stigmatised capitalism.” And under stigmatised capitalism, theprevailing zeitgeist has hobbled policymakers’ efforts to address thelegacy of the twin-balance-sheet problem, which, in turn, hasconstrained growth.Indeed, the mere thought that major shareholders’debts would be forgiven at taxpayers’ expense has created politicalparalysis for years. After all, why should ordinary people bear theburden of fat cats who are laughing all the way to the bank?Seenagainst this background, it is easier to understand why India’s economicreforms have taken so long to adopt, and why they have been sodifficult to implement. At the same time that the government has had toresolve the twin-balance-sheet problem, it has had to ensure thatpromoters cannot regain access to their assets, driving up fiscal costs.India’searly-stage experience with capitalism has lessons that other countriesshould heed in an age of rising tech giants. The Indian model, wherebypublic-sector-banks lent to private firms, proved so toxic and difficultto replace that public-sector bank ownership itself has lost much ofits traditional socialist appeal. The irony is that after a long andbruising experience with crony capitalism, the best thing for India nowmight be more capitalism, starting in the financial sector.This commentary is based on the just-released Economic Survey of India. – Project Syndicate* Arvind Subramanian is Chief Economic Adviser to the Government of India.