Awakening Of India Inc
Since 1991, we have moved from irrational exuberance to learning from mistakes to cronyism to more ethical ways of doing business
The 1991 reforms unleashed the “animal spirits” of India Inc. But that’s not saying much. One should say it triggered two different kinds of animal spirits: the suppressed force of entrepreneurship, and the baser passions of greed and crony capitalism.
What the PV Narasimha Rao-Manmohan Singh reforms did was eliminate the worst rigours of the licence-permit Raj, freeing businesses to go out and succeed. What it failed to do was create a pathway to quick failure by allowing the markets to decide success.
The State retained with itself the right to decide success and failure. Reforms did not debunk the idea of big government; and populist governments, usually led by the Congress, spent money like water, allowing businessmen to feed off the udders of Mamma socialism, too. Little effort was made to reform governance through transparency and effective and fair regulation, which came in sporadic bursts whenever the public summoned up enough outrage over scams and corruption.
Barring occasional attacks of conscience over the last 25 years, India Inc used money power to suborn the State and capture the regulatory apparatus in many areas. Samuel Huntington famously stated that the poor use the vote to buy themselves economic benefits; the rich use money to achieve the same ends. Crony socialism and crony capitalism are the two sides of the same crooked coin.
Nothing exemplified this more than the 2G spectrum and coal block allocation scams, where business was in bed with politicians to corner underpriced assets, all in the name of giving the poor cheap telephony or power. The assets allowed businesses to extract rents in a competitive scenario.
So while the reforms empowered entrepreneurs and professionals to create new businesses, opened up access to debt and equity capital, and enabled inorganic growth through mergers and acquisitions both in India and across the globe, a substantial part of India Inc continues to be focused on rent-seeking opportunities.
But there is a positive side to the ledger. The biggest gain for India Inc post-liberalisation has been an acceleration in its learning curve. With no Nanny State to tell them where, how and when to invest, businesses made their own decisions, their own mistakes and fought for survival. From the Tatas to the Birlas, Ambanis, Mittals and various infrastructure players, they went forth to multiply, sometimes succeeding, sometimes failing, and usually learning the right lessons. Reforms made men out of the Mamma’s boys of the pre-1991 era.
Take the Tatas. They went out and bought Tetley, Jaguar Land Rover (JLR), and Corus. While Tetley and JLR paid off in spades, Corus is bleeding the group. Their lesson: overpaying for business at the peak of a commodity boom is avoidable. The Birlas learnt similar lessons with their acquisition of Novelis.
Sunil Mittal, who forayed into Africa through the purchase of Zain’s African assets, overloaded himself with debt and is still struggling to get it down. In fact, the major lesson India Inc may have learnt between 1991 and now will be that the debt-equity ratio should not be skewed towards the former.
Another lesson learnt by India Inc while venturing abroad is that it must pay attention to the law. Local law. This is something India does not teach well.
In pharmaceuticals, which has produced many world beaters in India, the likes of Sun, Ranbaxy (since folded up into Sun), Dr Reddy’s, Glenmark and others learnt the hard way that American standards of plant hygiene and processes have to be maintained back home, if one wants to export to the world’s biggest market.
In IT, India’s most profitable global companies, both TCS and Infosys have fallen foul of visa laws and equal treatment of local hires. They have been sued; while Infosys settled its case for $35 million, TCS was recently fined nearly $1 billion for allegedly stealing healthcare software from an American company.
Though it is appealing, it is clear that Indian companies, used to lax enforcement of the law back home, have taken hard knocks abroad, and are now the better for it. Clearly, they cannot afford to take a casual attitude towards fraud and IPR issues in the United States and elsewhere. GMR, which lost its airport contract in Maldives, must have learnt that political risks cannot be underrated in venturing abroad.
They are learning that back home too. Even if politicians can be bought off, there are social sector busybodies and the courts to get after you. Those who thought they had got away with 2G and coal licenses were hammered by the courts. Vedanta was thwarted from mining for aluminium in Odisha by tribal activists. Reliance could not get a higher price for its gas from the Krishna-Godavari despite being promised market-related prices when it had bid for the offshore blocks. Its alleged efforts to gold plate investments didn’t help.
To understand what economic liberalisation has meant for business, and how the latter used or misused the opportunities flowing from it, we can break up the post-independence period into four phases. The first phase was the 1950-1980 period, when socialism was the watchword and bloody-minded licensing the official mantra; then we had the twilight period of the 1980s, when we saw an easing of licensing and snail-paced liberalisation; then came the big-bang 1991 reforms precipitated by external bankruptcy, which led to regular and incremental changes to open up the markets and expand the space of economic freedom. More recently, we have seen a new phase beginning from 2009-10, where conscious efforts have been made to shrink the crony culture and eliminate discretion in economic decisions that could favour the crooked. But we are far from home on this front.
The complexion of India Inc has changed in each of these phases. In the first licence-permit Raj phase, big business was treated as an untouchable (except behind purdah), and the established big boys of the pre-independence era stayed put, retaining their powers clandestinely. Apart from the Tatas and Birlas, the big houses of this era were the Mafatlals, Singhanias, Dalmias, Godrejs, Modis, Walchands, Bajajs, and TVS, among others. Most of them were into basic commodity businesses. In phase one, business houses were mostly frozen in a pecking order that seldom changed.
Phase two, which began with Indira Gandhi’s second coming in the 1980s after the Janata Party experiment ended in ignominy, saw cautious moves towards liberalisation, providing the perfect opportunity for cronies to sneak into the picture. In this phase, licensing remained on the statute books, but industrial buccaneers could force changes by influencing policymakers with money power.
This was when the Ambanis, Ruias, Dhoots, Jindals and other businessmen gatecrashed into the big league, using money from the capital markets, and taking advantage of the gaps in the licensing regime to build scale and effective oligopolies in the emerging areas: polyester, TVs, steel, cement, power, and petrochemicals. This was the phase that established cronyism as the norm in Indian business, but it also saw the rise of fresh entrepreneurship talent: we saw Karsanbhai Patel take on Hindustan Lever with Nirma; the Sekhsarias of Gujarat Ambuja Cement built the most efficient cement plant of that time.
Phase three began after 1991 with the formal ending of the licence-permit Raj and continues to remain strong even after phase four began about five to seven years ago, following the public outcry against corruption in several areas (spectrum, coal and minerals, oil and other scarce resources).
While 1991 ended the restraints on growth and expansion, it did nothing to restrain greed, cronyism and outright crookery. If the earlier phases needed you to corner licences, in phase three, you needed to corner the entire policymaking and regulatory apparatus by using higher levels of political influence and moolah. This was the phase when unknown companies like Himachal Futuristic could grab telecom licences, and then get policymakers to change the rules to escape after overbidding. Policies were tweaked in petrochemicals to favour this entrant or that, and high import duties were evaded through under-declaration of imported machinery and suchlike devices.
Freedom to raise capital from the market led to hundreds of promoters floating bogus plantation and leasing firms and then vanish completely. Loot had gone upscale.
The opening up of sectors previously reserved for the public sector—telecom, infrastructure, ports and airports, aviation, steel and power—saw the rise of many more new entrepreneurs. We saw the Mittals of Airtel, the GVKs, GMRs, Lancos and Satyams of Andhra Inc. Andhra Pradesh became the crony capital of the UPA era, as YS Rajasekhara Reddy was sending the Congress party’s biggest contingent to the Lok Sabha. Andhra Inc grabbed many infrastructure and airport privatisation contracts, and the fact that they overbid and are now struggling with debt shows that they are paying the price for greed.
Phase three, which was triggered by the forex crisis of 1990-91, also saw the rise of more legitimate businesses, with IT and IT-enabled services riding to glory, especially after the dotcom boom. When accumulating forex became a national obsession after 1991, governments played a benign role in exchange-earning businesses, enabling them to grow to global scale and profitability. This was when we saw the rise of TCS, Infosys and Wipro, which forced the global majors like IBM and Accenture to set up shop here to stay competitive.
As the IT boom plateaued, we now have the e-commerce boom, this time, funded not by the taxpayer but by foreign venture capitalists and private equity. The true animal spirits are being nurtured by private money this time.
Growing along with the economy in phase three was finance: with banking licences remaining in the discretionary area (apparently to prevent hijack by big business), the occasional grant of licences to new banks became a source of more scandal and skulduggery. Global Trust Bank had to be wound up and absorbed into Oriental Bank after it managed to damage its balance sheet by imprudent dealmaking. Centurion Bank, Bank of Punjab and Timesbank, though not linked to any major scandal, had to be merged with stronger banks to survive.
But the place is infested with cronies is the socialist space: public sector banking. At the end of the UPA regime in 2014, bad loans had shot up to more than Rs 4,00,000 crore, and it was the public sector banks that were the prime victims of this cash-and-carry looting.
Promoters used political contacts to coax larger amounts of loans and indulgences from public sector banks, and today both the lenders and the borrowers are in dire straits.
Cronyism kills the hands that feed it. Ask Vijay Mallya. He is licking his wounds in London due to imprudent borrowing intended to keep a bankrupt airline flying; his bankers are licking theirs in India for agreeing to do so, possibly under political pressure that cannot be proven.
What phase three did was raise the stakes for cronyism, and this peaked during UPA 1 (2004-09) when thousands of crores worth of spectrum and coal blocks were given out at prices far below market. It was only after the Comptroller, and Auditor General (CAG) mentioned gigantic loss figures of Rs 1,76,000 crore and Rs 1,86,000 crore for the 2G and coal scams that this phase started winding down. But it is by no means over.
Reason: the real rent-seeking opportunities are now in the states, and the biggest gusher is land. This is why UPA was so keen to legislate the Land Acquisition Act, which has the net effect of making land costlier for everybody, and enables even more corruption as the onerous rules prescribed by the law ensure illegal profits for everybody.
The Land Acquisition Act is the ultimate testimony to politicians’ distrust of the market. The UPA used the argument of unfair expropriation of land from the poor in the past to effectively distort and disrupt the market by mandating the payment of four times the “market” price for rural land acquisitions.
The Land Acquisition Act will ensure that land will be the last resource to be freed from cronyism.
But consciousness about land and property scams has been rising, and both politicians and businessmen have been felled by it. Sonia and Rahul Gandhi are facing trial over a caper to grab the assets of National Herald. Sonia’s son-in-law is being scrutinised for land deals in Haryana and Rajasthan. A sitting BJP minister in Maharashtra, Eknath Khadse, was eased out when it was discovered that he might have acquired land earmarked for the Maharashtra Industrial Development Corporation by misusing his ministerial powers. DLF and listed real estate companies have been the biggest value destroyers on the stock markets; the high prices of the properties they own apparently don’t translate into stock market valuations, suggesting that the value is captured somewhere else.There is no business more crooked than the land business.
After the UPA-era scams, the election of Narendra Modi in 2014 and the Supreme Court’s growing interest in corruption, India Inc is entering the fourth and more ethical phase of business growth. It is hard going, as banks are squeezing companies to get their money back, the government is handing over scarce resources like spectrum and mine blocks only through an auction process (where there is very little scope for hanky-panky) and courts are breathing down the necks of both politicians and businesses to stick to the straight and narrow.
In 1991, the Indian economy began reforming itself. In the last few years, both government and business are reforming themselves. Twenty-five years after reforms, the real reforms—of governance, legal systems, et al.—that are needed to make the purely economic side of reforms work, are just beginning to happen. India Inc is taking it on the chin—and will be smarter and better at business than before.
While introducing his pathbreaking reformist Budget of 1991-92, Manmohan Singh ended his speech by quoting Victor Hugo. He said:
No power on earth can stop an idea whose time has come. I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.
Correction. India was not quite wide awake then. It is, now.
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