After 11 months of battling speculators nipping at India's currency, Raghuram Rajan is going after a more powerful enemy: the nation's crony capitalists.
Six years ago, Rajan, a former International Monetary Fund chief economist, was warning about India's billionaire problem. After Russia, as he repeatedly pointed out, India had the most billionaires per $1 trillion of gross domestic product. Most were not self-made entrepreneurs, but well-connected oligarchs who had exploited stealth privatizations and huge and inefficient government subsidy programs to build up massive fortunes.
Rajan, now governor of the Reserve Bank of India, is calling out those same billionaires. "An important issue in the recent election was whether we had substituted the crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians," Rajan said in Mumbai on Monday. "By killing transparency and competition, crony capitalism is harmful to free enterprise, opportunity, and economic growth. And by substituting special interests for the public interest, it is harmful to democratic expression."
Rajan's frontal attack is clearly meant as a prod to India's new Prime Minister Narendra Modi. During this spring's elections, Modi pledged to improve life for the more than two-thirds of India's 1.2 billion people eating less than minimum government targets. Two weeks ago, his government blocked part of a World Trade Organization trade deal in order to protect India's ability to expand a food-subsidy program. Yet, as Rajan rightly points out, such unwieldy schemes tend to enrich middlemen at the expense of the hungry.
Rajan's solution is to transfer aid money directly to the poor for food and other necessities. While at the IMF between 2003 and 2006, Rajan saw both Indonesia and Mexico successfully experiment with this now-common idea. By contrast, old-fashioned subsidy programs such as India's have only deepened inequality and put pressure on the national balance sheet.
Seeing the rich get richer while so many Indians see their lives stagnate is testing the credibility of the country's vibrant democracy. "One of the greatest dangers to the growth of developing countries is the middle-income trap, where crony capitalism creates oligarchies that slow down growth," Rajan said. "To avoid this trap, and to strengthen the independent democracy our leaders won for us 67 years ago, we have to improve public services, especially those targeted at the poor."
Rajan's cash transfers are far more WTO-friendly than India's current system of subsidies. They're also more efficient: Massive government intervention has resulted in huge food stockpiles that often rot instead of going to the poor. Modi knows this, or he should. He's also the first Indian leader in years with enough charisma and seats in parliament to take on the corrupt patron-client political system.
Will he? Modi, who is thought to be personally incorruptible, has nevertheless been accused of favoring big businessmen in Gujarat, where he served as chief minister for more than a decade. If his sky-high approval ratings start to dip, it's an open question whether his Bharatiya Janata Party will let him dismantle a giant rent-seeking machine that ensures its survival.
The truth is that we are years away from knowing if Modi is the modernizer he claims. Rajan, though, can play a key role in keeping the prime minister on the right track. The central bank governor is proving himself to be an adept politician; on Monday he was careful to praise Modi's plan to create bank accounts for the poor -- into which aid cash can be transferred -- even while implicitly criticizing the government's decision to kill the WTO deal. If Rajan can make a dent in the billionaire problem he's long lamented, he may just make India -- and the world -- a more vibrant place.
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