Chronism prevents competition, can shake India's $ 5 billion dream

NEW DELHI: Erodes wealth , introduces inefficiency and prevents efforts to unleash the power of a competitive field with a level necessary to increase the size of the Indians economy to $ 5 billion, he said Friday.

The government report card was based on the 2010 federal auditor's report on the allocation of the 2G telecommunications spectrum and the Supreme Court in 2014 canceled the allocation of 214 blocks of coal to emphasize the need to end the discretionary allocation of All natural resources.

In both cases, the federal auditor had said that the government lost money by giving away precious national resources to commercial entities without auction. The audit report of the carbon block allocations was first reported by TOI on March 22, 2012.

“When opportunities for crony rent-seeking exist, firms shift their focus away from growth through competition and innovation towards building political relationships, thus undermining the economy ’s capacity for wealth creation,” the Survey said adding it also discourages innovation for creative disruption in the market -- a prerequisite at a time the government is pushing to develop a start-up economy .

"Pro-crony" policies also add to the economy ’s costs “Further, the rents sought by cronies are paid for by genuine businesses and citizens who are not receiving any preferential treatment. Such a transfer of wealth exacerbates income inequality in the economy , as crony firms leverage their connections to extract a larger share of existing wealth instead of expanding the available wealth .”

The survey refers to studies on the evolution of the average market share of companies that received unlicensed coal blocks between 1993 and 2011. “There has been a constant decrease in the market share of these companies even though they obtained a Unexpected gain of discretionary allocation. The gain of an almost free resource should have helped the company's productivity and business fundamentals. On the other hand, the market share has decreased over the years, which suggests a case of Dutch disease: the companies that obtained the free resource diverted the efforts towards the tunneling of the unexpected gain instead of the productive commercial activity.

As a case in point, the Survey reflects on another study to note that before 2010, it was beneficial for a company and its shareholders if the promoters had (political) “connections”. The index of ‘connected’ firms consistently outperformed the BSE 500 index as they systematically made more profits than would have been possible in a more competitive economy . The market priced the current and future abnormal profits of these firms.

In an oblique reference to the current financial woe of telecom players, the Survey noted that the federal auditor’s report on the 2G spectrum allocations “appears to have reversed the fortunes for the connected firms. “The connected index started to underperform the market starting 2011. In fact, the gap for the investor wealth destroyed by “connected” firms is widening over time, which reflects the inability of such firms to systematically create value for their investors from extracting rents based on their political connections.