Pro-crony policies till 2011 eroded wealth, destroyed value and created wilful defaulters: Economic Survey
New Delhi/IBNS: The Economic Survey 2019-20 says India’s aspiration to become a $5 trillion economy depends critically on promoting “pro-business” policy that unleashes the power of competitive markets to generate wealth, on the one hand, and weaning away from “pro-crony” policy that may favour specific private interests, especially powerful incumbents, on the other hand.
The Survey tabled by Finance Minister Nirmala Sitharaman said that economic events since 1991 provide powerful evidence supporting this crucial distinction.
The number of Sensex firms in manufacturing has reduced while those in services has increased between 1988 and 2019. Almost 60 per cent of the Indian GDP is attributable to the services.
The Economic Survey 2019-20 observed that pro-crony policies, in contrast to pro-business ones, erode wealth in the economy as cronyism fosters inefficiencies by inhibiting the process of creative destruction.
The connected firms proxy firms that may benefit from pro-crony policies.
Despite impressive progress in enabling competitive markets, pro-crony policies have destroyed value in the economy.
From 2007 to 2010, an equity index of connected firms significantly outperformed the market by 7 per cent a year, the survey noted. These companies extracted abnormal profits at the expense of the common citizens. In contrast to this, the index underperformed from 2011 reflecting the inefficiency and value destruction inherent in such firms, the survey pointed out.
Pro-crony policies as reflected in the discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while the competitive allocation of the same resources post-2014 has put an end to such rent extraction, it said.
A shift to the market-based allocation of resources takes these avenues away, encourages productive economic activity and generates more wealth.
Similarly, crony lending that led to wilful default, wherein promoters collectively siphoned off wealth from banks, led to losses that dwarf subsidies directed towards rural development.
Every rupee lent to wilful defaulter constitutes an erosion of wealth. As of 2018, wilful defaulters owed their respective lenders nearly Rs.1.4 lakh crores.
Had the money siphoned away by wilful defaulters stayed in the economy, the resulting wealth would have been equivalent in value to that needed to double the allocation towards health, education and social protection, double the allocation towards rural development, or triple the allocation towards MGNREGA.
The Survey said that wilful default, if unchecked, would increase the cost of borrowing for everyone else, including genuine businesses with profitable investment opportunities before them. Adverse selection may force genuine borrowers to exit the market altogether, leaving only cronies in the market and resulting in a market failure that slows economic growth, employment and wealth creation capacity.
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