"By killing transparency and competition, crony capitalism is harmful to free enterprise, opportunity, and economic growth," Rajan said, delivering a public lecture instituted in the memory of noted bureaucrat Lalit Doshi here this evening.
The academic-turned-central banker also noted that "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" was a major issue in the recent elections.
He further said that one of the greatest dangers to growth of developing economies like India is the middle income trap where crony capitalism "creates oligarchies that slow down the growth."
The only way of avoiding this trap is to strengthen public services, especially those for the poor, he said, adding that financial inclusion drive of the government and RBI is a a key initiative in the same direction.
"Financial inclusion and direct benefits transfer can be a way of liberating the poor from dependency on indifferently delivered public services, and thus indirectly from the venal but effective politician," he said.
Rajan also said that people tolerate crony capitalism and vote for "a venal politician" who perpetuates it because the politician "is the crutch that helps the poor and underprivileged navigate a system that gives them so little access".
The solution to this problem lies only in making the system more efficient, he said.