a year in the 1990s and under 2 percent a year in the first decade of this century. Russia, after a sharp decline following the collapse of communism, has grown by an annual average of over 4 percent since 2000. Those are good numbers, but they pale in comparison with the performance of emerging market tigers like China, where average annual growth over the past decade has been 9 percent; India, which averaged 7 percent; or Brazil, which grew at an average rate of over 3 percent.
But as Rajan warned his audience at the Bombay Chamber of Commerce, even in India, with its stellar economic growth and democratic political system, rent-seeking is turning out to be a very effective way to join the super-elite.
RENT-SEEKING AND THE END OF THE LICENSE RAJ
It wasn’t supposed to turn out this way. Manmohan Singh, another idealistic technocrat who became prime minister in 2004, had brought the global market reform revolution to India in 1991 when he was finance minister. The animating idea was to liberate the country from the License Raj, a protectionist system that sheltered state- dominated firms and the privately owned national champions who were in on the game. The old system was a good deal for government officials and for the private firms granted access to the License Raj, but it was a poor setup for everyone else. India’s GDP increased at a sleepy average of around 3 percent in the decades between independence and 1991—known, with self-deprecating irony, as “the Hindu rate of growth”—and India’s consumers, who were poor to begin with, had their purchasing power further eroded by being limited to more costly and lower- quality domestic goods.
Like Soviet communism, which had been a partial ideological inspiration for “third-way” India—when he trained as an economist in the 1970s, one of Singh’s projects, like that of all Indian economists of his generation, was learning how to create a five-year national central plan—the License Raj was a rent-seeking dystopia. Singh’s reforms were meant to end that systemic corruption and create an economy where the way to get rich was by producing more, better, and cheaper goods and services.
By many measures, the reforms were a dazzling success. The Indian economy grew an average of 7 percent in the past two decades, and average annual per capita income nearly quadrupled between 1991 and 2011. But on the road to the market, Indians have had one unwelcome surprise. Ending the License Raj hasn’t ended rent- seeking. In fact, government connections are probably more lucrative today than they were in the old system.
As in other liberalizing emerging markets, India’s reforms have been a hugely effective mechanism for billionaire creation. India had just one billionaire in 1991, on the eve of Singh’s reforms. In 2012, there were forty- eight. With a fortune of $22.3 billion, Mukesh Ambani was the richest Indian in 2012. He had just under a third of the wealth of Slim and, because India is so vast, a fraction of his control of the national economy. As a group, though, India’s plutocrats—the forty-eight billionaires—in 2012 had a combined net worth equal to more than 14 percent of their country’s GDP. That’s equal to the economic footprint of America’s 424 billionaires.
The rent-seeking side of Indian capitalism became a dramatic part of the national conversation in 2010, when tapes tax investigators had made of more than 140 conversations of Niira Radia, a glamorous Delhi lobbyist, were leaked to the media. In the hundreds of hours of talk between Radia, businessmen, journalists, and politicians, ministries are described as ATM machines and the ruling party is called “our shop.” She is explicit about how lucrative mobile phone licenses were allocated: “When it came to spectrum, they went to [Andimuthu] Raja [the telecommunications minister] and paid him a bribe and got spectrum allocated,” she tells a rival businessman.
One measure of the impact was an Indian version of the popular protests that swept the world in 2011, from Tahrir Square to Zuccotti Park. The subcontinent’s 99 percent coalesced around Anna Hazare, a veteran activist whose anticorruption hunger strike rallied the country’s hitherto quiescent urban middle class and may lead to the creation of a stronger anticorruption investigative body.
One of Hazare’s top lieutenants is Dr. Kiran Bedi. Bedi is a national legend in her own right. She was the first Indian woman police officer—officials asked her to consider another career when she applied to join the force in 1972—and rose to be the head of its investigative division. She once doused herself in water from a street fountain before running into a burning building to lead her team in the rescue of its seventeen occupants. She is equally famous for having Indira Gandhi’s car towed for parking illegally—a beloved signal that no one was above the law. When I met Dr. Bedi in Mumbai in 2011, she was a sixty-one-year-old grandmother with glasses and her black hair trimmed in a brisk boyish haircut. Bedi is small—she claims five feet, three inches—and was once lifted from the ground by a student protester she was policing. She was dressed in a vibrant turquoise shalwar kameez that matched her energetic manner.
“India has been overwhelmed by corruption scams,” Dr. Bedi told me. “While it has been apparent that India is shining, India has also been declining in many ways in that there has been rampant exposure of corruption.
“It was a relationship of illicit wealth between the people in power and the people who had money,” Dr. Bedi said. “The rich could get richer by buying to be rich. They could afford to buy better contracts and those contracts which are expensive and monopolistic—the mining rights, the key infrastructure rights… They broke the balance of a level playing field for the younger and the newcomers, so therefore I think that was the imbalance which happened in the economy or in the distribution of the economy.”
Nor is it just the activists who have come to fear that alongside India’s remarkable economic surge the rot has been spreading, too.
“Corruption is endemic,” Rajiv Lall, the chief executive officer of the Infrastructure Development Finance Company, a partly state-owned financial institution, and the official who invited Rajan to give his Bombay Chamber of Commerce lecture, told me. “I don’t think anybody here is pretending that there’s no corruption in the country. And corruption can take on a new dimension, especially in this time of great transformation.”
“The Gini coefficient [an economic measure of income inequality] always rises whenever growth takes off,” Arun Maira, a former industrialist and now a member of the country’s influential planning commission, told me. “When you open more opportunity, like more free markets and the opportunity for people to do their own thing, those who already have some capital, or they have some education, or they have access to people in power so that they could help get access to the new opportunities more easily, they will first grow themselves, their own wealth. So you will get the people with something becoming richer faster than those who don’t have access to education, to some capital, and to the system.”
As Mr. Maira pointed out, one of the most powerful advantages of the 1 percent is “access to people in power.” Corrupt business deals are the most extreme use—and abuse—of those relationships. But there is a more subtle reason the game is most effectively played by those who are already winning it.
“The tendency is that people who have access to power and access to governments, etc., tend to get a better deal actually,” said Kris Gopalakrishnan, the cochair of Infosys, the pioneering Indian technology company. “The policies, the roots are framed because they are people who give inputs to those policies. Because you don’t ask everybody when policies get formed. You ask the key people I need to talk to.”
To understand what it is like to operate in a society where both opportunity and corruption are flourishing, I spoke to a young, up-and-coming Mumbai businessman. Raj, who is in his midthirties, agreed to be frank in exchange for my promise not to use his name (the details of his life are precise; the name is disguised). In America, where he went to business school, Raj would be a member of the 1 percent. In India, where he was born, Raj is part of the 0.1 percent, but he is no billionaire.
After getting his MBA at Duke, Raj went to work for one of the major consulting companies in New York; he still owns a one-bedroom apartment in the Flatiron district, which he bought partly as an investment and partly to maintain a connection with the city he loves. Two years ago, however, he moved to his company’s newly opened office in his hometown, Mumbai, and he plans to make the rest of his career in India. Raj believes the Indian economy will grow at least 7 percent a year for the next decade, creating a world of possibilities unimaginable in the slower-developing West. One example: in addition to his day job and his duties as the father of six-year-old and six-month-old daughters (his American-born wife works part-time at another multinational), Raj has founded his own company, which manufactures molded-plastic injection parts.
“You could be a billionaire if you moved to India, too,” he tells me. “All you need is the luck to meet the right government official and a willingness to risk going to jail.”
