The Reserve Bank of India (RBI) governor Raghuram Rajan on Monday lashed out at crony capitalism and crooked politicians, and called to strengthen the public services directed at the poor as India completed 67 years of independence.

In a hard hitting speech, at the Lalit Doshi memorial lecture, the governor highlighted the need to nip corruption.

"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. If there is some truth to these perceptions of crony capitalism, a natural question is why people tolerate it. Why do they vote for the venal politician who perpetuates it?" he asked.

According to him, it is an all-too familiar vicious circle in India where the wily politician controls the system through stifling money and resources to the poor. "The poor and the under-privileged need the politician to help them get jobs and public services. The crooked politician needs the businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the crooked politician to get public resources and contracts cheaply. And the politician needs the votes of the poor and the underprivileged. Every constituency is tied to the other in a cycle of dependence, which ensures that the status quo prevails.”

Rajan said, “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. If the debate during the elections is any pointer, this is a very real concern of the public in India today."

He said it is important to avoid this trap.

"To strengthen the independent democracy, our leaders won for us 67 years ago a key mechanism to improve these services through financial inclusion and decentralisation of information."

He lamented that “Our provision of public goods is unfortunately biased against access by the poor. Crony socialism of the past has replaced the crony capitalism."

Ahead of monetary policy review on Tuesday, Reserve Bank of India (RBI) governor Raghuram Rajan on Sunday called on Prime Minister Narendra Modi and is likely to have discussed the macro-economic situation and issues related to price rise.

The RBI’s bi-monthly policy review on 3 June will be the first after Prime Minister Narendra Modi assumed office on 26 May. Last week, Rajan also met the newly appointed finance minister Arun Jaitley and had said fighting price increase is a priority, stressing that the central bank has always maintained a balance between the need to check inflation and prop up growth.

“Governor of the RBI Raghuram Rajan called on Prime Minister Shri Narendra Modi at 7, Race Course Road today (Sunday). It was a courtesy call,” an official statement said.

India’s economic growth stayed below 5% for the second year in a row at 4.7% in 2013-14. Growth remained subdued at 4.6% in the fourth quarter. The RBI may leave key interest rates unchanged in its 3 June monetary policy review as Rajan is likely to prefer containing stubborn inflation before conceding to demands for a rate cut to boost growth.

“RBI is likely to maintain status quo as inflation is still high and the threat of monsoon being weak this time is looming large,” Indian Overseas Bank chairman and managing director M. Narendra told PTI.

Rajan had kept the policy rate unchanged at 8% in its 1 April review as inflation, especially of food items, hovered at over 8%. Food inflation in April stood at 9.66% and retail inflation was at 8.59%.