Rent Seeking, Indian Politicians and “Bombay Club”

Sometimes in early 90s a group of Indian industrialists formed an informal club in a five star hotel in Mumbai (then called Bombay). The agenda of this club was to oppose liberalisation of Indian economy.

Then prime minister of India PV Narsimha Rao and finance minister Dr. Manmohan Singh wanted to liberalise Indian economy so that competition would improve the quality of goods produced, bring down prices so that customers i.e. citizens of India will benefit.

“People have been given the wrong impression that the Bombay Club is protectionist and wants the reforms process to be rolled back. Let me clarify that there is no such thing as Bombay Club. As I am perceived to be a spokesperson for this Club, let me make myself clear: I believe that almost all the big Indian companies in future should not become foreign-controlled.”

-Rahul Bajaj, Industralist

Indian industrialists were afraid of competition; they decided to lobby for protection, to prevent entry of foreign companies. Bombay Club was formed to influence government to slow down the pace of liberalisation. By preventing competition Bombay Club wanted to increase their share of profit at the cost of customer. Customer would end up buying low quality good for high price.

Bombay Club also tried to justify status quo under the guise of national interest.

“It wasn’t a Bombay ‘club’ in the sense that there was no constitution, nor a clubhouse. Also, some industrialists such as the late Lalit Thapar who attended its meetings were from Delhi. But those meetings did take place and their agenda really was stalling or slowing reforms”

-Sucheta Dalal, Reporter

While Bombay Club got support from non-ruling parties esp. Communists, the ruling party stood firm and Indian economy underwent liberalisation. Communist mouthpiece Frontline magazine published article by Rahul Bajaj which justified opposition to liberalisation.

“Nowadays, we are constantly reminded about the interests of the consumers. No one can argue against this. Companies that do not satisfy their customers will not survive. However, we must keep in mind national interests and national pride.”

-Rahul Bajaj in Frontline

This activity is called as rent seeking (it is different from paying rent to your landlord).

Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation.

An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the company.

Opposition to liberalisation is just one aspect of rent seeking. Political parties need funds and votes. The pressure groups force political parties to indulge in rent seeking by continuing grant of subsidies, continuing existence of bankrupt public sector companies like Air India, all under the guise of national interest.