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Economic liberalisation and rent seeking in India

Why is it high time that India requires formal rules to make rent seeking legitimate?

- Manoj Mathew

India embraces the open economy

In 1990–91, double-digit inflation and an acute balance-of-payment crisis haunted the government of India. The country was without sufficient reserves, India started mortgaging its gold reserves to the Bank of England in order to obtain cash reserves needed for the payments in the country. This currency crisis required a new economic policy approach in the socialist state. The reforms facilitated the ability of the private sector to contribute to the economic growth, to ensure benefits to the poor (Ahluwalia, 2020). The economic liberalisation in 1991 under the leadership of Finance Minister Manmohan Singh, and the Prime Minister Narasimha Rao, enabled India towards an open economy by dismantling one of the most rigidly controlled policy regimes in the world.

Rent seeking in India

As millions were rewarded from the liberalisation, India continued to experience the powerful idea of ‘rent seeking’. In rent seeking, people through political or administrative influence, engage in lobbying[3] government to give them special privileges. An idea advocated by economist Gordon Tullock in 1967, and later Anne Krueger coined the term with her research focus on India and Turkey.

According to the study (Krueger, 1974), government heavily regulated the people’s economic lives, enabling the government the power to create ‘rents’ equal to a large percentage of national income. Krueger highlighted that in market-oriented economies in which government restrictions upon economic activity are life's pervasive facts. Such restrictions give rise to rents in a variety of forms; and people often compete for rents, which she considered such competition ‘perfectly legal’. Rent seeking takes other forms, such as bribery, corruption, smuggling, and black markets (Krueger, 1974).

The result of economic liberalisation, the predatory economy became more competitive, allowing for higher rents. They received the same proportion of a larger pie (Lal, 2010). The scams unfolded through illicit lobbying actions in the goal of expanding riches and new types of rent-seeking. Business houses with enormous financial backing, had policymakers on their side and influenced the policy making process.

Rent seeking has political implications

Rent seeking is a political economy concept (Congleton, Hillman, & Konrad, 2008). In 1987, the country witnessed the worst corruption scandal where the ruling Prime Minister, Rajiv Gandhi’s government, top politicians and defence personnel was accused of receiving of receiving kickbacks from the Swedish arms manufacturer in return for a $1.4 billion contract to supply the Indian army with Bofors field howitzers. The failure of renting seeking has political implications, and the anti-incumbency of the government to address to the needs of the poor turned to be disaster for the Congress party, they lost the 1989 general election.

Accountability remains a big concern. We are reminded of political scientist Francis Fukuyama who said ‘state capacity in many new and existing democracies has not kept pace with popular demands for democratic accountability’ (Fukuyama, 2015). The political nexus with massive contributions in the recent election campaigns highlights how money and politics interact in a developing democratic setting (Kapur & Vaishnav, 2018).

Corporate Lobbying in India

In practise, corporate donations are indistinguishable from bribes. Politicians invest their personal wealth, so parties become receptacles for untaxed wealth and dirty cash through rent seeking (Guha, 2019). From Facebook to Dassault Reliance Aerospace Limited (DRAL), corporates influence policy decision making with the policymakers and bureaucrats. It gets complicated when supported by backdoor lobbying leading to scams like 2G spectrum scam that tells us how informal phone conversation by corporate lobbyist Radia Niira can turn to be questionable in the India legal regulatory framework.

Indian politicians have understood the modern day lobbying when the Parliament debated in 2013, after Wal-Mart Stores Inc. stated in a routine disclosure report to US Congress that it had spent $25 million on lobbying activities in Washington including on issues related to “enhanced market access for investment in India” (Desai, 2015). Lobbying is not yet recognized in India, unlike in the Australia, Canada and US. In US the Lobbying Disclosure Act (LDA) 1995 regularised lobbying, a form of communication to influence policy matters.

“The existence of the state is essential for economic growth; the state, however, is the source of manmade economic failure” said the co-winner of the 1993 Nobel Prize in Economics, Douglas North. In his New Institutional Economics revolution study, he highlighted how informal rules shape institutions and path dependence in economic development.

Indeed, elections are the primary mechanism of leadership selection in institutions ranging from civil society to market governance (such as mandis that regulate local agriculture markets) and from dairy cooperatives to urban housing societies (Kapur & Vaishnav, 2018). Most of these cases, money is involved. Scams that closes after some media discourse, it’s often clear the government was influenced and the rule of the law was not followed.

Rent seekers in the emerging land market

With the Forty-fourth constitutional amendment in 1978, right to property ceased to be a fundamental right, the unfair practices in land acquisition scaled in the open economy. Two recent policies will advance crony capitalism, First, the Securities and Exchange Board of India (SEBI) approval for the Real Estate Investment Trust (REIT) platform, enabling all investors to invest in real estate market in India. Second, governments aim to build 20 million affordable houses in urban areas across the country by 2022, under the ambitious Pradhan Mantri Awas Yojana (PMAY) scheme of the Union Ministry of Housing and Urban Affairs. These reforms in the real estate and the demand for housing will further expand the private and state role in land acquisition. This sort of economic behaviour is a rational, self-seeking nature which nevertheless destroys rather than enhances the resources available to society. (Tullock, 2005). We need to address the elephant in the room: ‘the economic controls by the government’ in many sectors, which is in need of the reforms.

Thirty years since economic liberalisation, rent seeking in India increased, to be manipulation of democratic government in order to obtain rents through injuring its citizens (Tullock, 2005), labelled by economist Jagdish Bhagwati as "directly unproductive profit-seeking". India requires formal rules that makes rent seeking legitimate; which will ensure that privilege seekers are accountable and transparent in the open economy.


· Ahluwalia, M. S. (2020). Backstage. New Delhi: Rupa Publications India.

· Congleton, R., Hillman, A. L., & Konrad, K. A. (2008). Forty Years of Research on Rent Seeking. New York: Springer-Verlag.

· Desai, R. D. (2015). Political Lobbying In The U.S. And India: How It's Different And Why It Matters. Forbes.

· Fukuyama, F. (2015). Why Is Democracy Performing So Poorly? Journal of Democracy.

· Guha, D. (2019, April 21). India's Shadow Lobbies: How Business Captured the Government.

· Kapur, D., & Vaishnav, M. (2018). Costs of Democracy: Political Finance in India. Oxford University Press.

· Krueger, A. O. (1974). The Political Economy of the Rent-Seeking Society Vol. 64, No. 3. The American Economic Review, 291-303.

· Lal, D. (2010). Post‐​reform Rent‐​seeking. The Business Standard.

· Tullock, G. (2005). Rent Seeking. Liberty Fund.

[1] Inflation is the decline of purchasing power of a given currency over time. India’s inflation was 13.48% in 1991. [2] Balance of payments (BOP), also known as the balance of international payments, is a statement of all transactions. [3] Lobbying is when a group of persons who conduct a campaign to influence members of a legislature to vote according to the group’s special interest.

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