Anatomy of Indian capitalism

Anatomy of Indian capitalism
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First Published: Tue, Dec 07 2010. 08 59 PM IST
Updated: Tue, Dec 07 2010. 08 59 PM IST
Ratan Tata has initiated an interesting debate on the nature of India’s capitalist class. His characterization of this class as crony capitalists may not be out of place given recent evidence on a politics, media, judiciary and corporate nexus.
Crony capitalism is a system in which businesses multiply their wealth not by fair rules of the market, but through their nexus with governments. Classic examples are the distribution of legal permits, licences, land, contracts, tax breaks and so on.
Is this the case in India? Information about the country’s billionaires from the Forbes rich list produces some interesting results.
There are now 69 billionaires in India, up from 49 in 2009 and 13 in 2004. Of these, Lakshmi Mittal, Anil Agarwal and Micky Jagtiani are non-resident Indians. The net wealth of the rest is $244.6 billion —roughly one-fourth of the national gross domestic product (GDP). Until 1998, billionaires in the country accounted for less than 1% of GDP; this remained less than 4% until 2005, but then shot up exponentially to at least 27% in 2008. The global slowdown took away some of this wealth, but now it is almost back to the 2008 levels. The real growth in the billionaire club, both in numbers as well as wealth has happened after 2004, when the United Progressive Alliance (UPA) government took over.
The spike in the number of billionaires appears to be fairly consistent with India’s larger growth story in the last decade, and is a reflection of the entrepreneurial opportunity economic reforms were meant to unleash. But the partial dismantling of the licence-permit raj would have implied that the new entrepreneurs would largely be from sectors that do not rely on permits to create wealth. Moreover, with services now accounting for at least 50% of GDP, more entrepreneurs would have taken advantage of the spurt in opportunities. Neither of these is borne out by an analysis of the Forbes rankings.
For the purpose of simplification, I have divided the sources of growth into two categories. The first comprises the “rent-thick” sectors that essentially rely on government permits and contracts for public infrastructure. These include ones that are dependent on mining, metals, constructions, land, real estate and so on. Telecom too, since spectrum is also a natural resource distributed by the government.
The second set consists of knowledge-based industries that rely on research and development, primarily in services but also in manufacturing. The information technology (IT) and pharmaceutical sectors would ideally belong to this category. Of these two groups, the rent-thick sectors would essentially benefit from their cosy relationship with the political class.
In 2004, of the 13 billionaires, two created their wealth in pharmaceuticals and two in IT; the remaining made their fortunes in rent-thick sectors. In 2010, out of 69 billionaires, 11 created their wealth in pharmaceuticals and six in IT. In comparison, 18 billionaires made their fortunes in construction and real estate, 15 of them in real estate alone; seven made their fortunes in commodities (metals and oil), and two in telecom. That makes 27 billionaires in rent-thick sectors. The total wealth of the knowledge-based sectors (IT and pharmaceuticals) is $55 billion, against $132 billion in the rent-thick sectors. Services account for only 20% of the total wealth of the 66 resident Indian billionaires.
How do they compare internationally? Net wealth of the 100 richest Americans is $836 billion; that of 100 richest Indians is $300 billion. That is, the richest Americans are only three times richer than their Indian counterparts.
There are eight Indians among the top 100 billionaires of the world, with none from China. Of the top 20 billionaires in the US, eight are from the IT sector, three from finance, five from retail and one from the media. Of the remaining three, two are from engineering and only one from real estate. In other words, one billionaire out of 20 is from a rent-thick sector. Among the top 20 in India, nine are from such sectors.
All 15 real estate billionaires in India joined the billionaire club between 2005 and 2010. Incidentally, they have also seen the fastest rate of wealth growth. On the other hand, IT sector billionaires have among the lowest rates of wealth increase.
Unfortunately, the growth of the billionaire club in India does not mean much for the other billion. A large number of Indians still consume less than Rs 50 a day, and the country is slipping on global rankings in many measures of human development. Our rankings on food, nutrition, gender and poverty issues in the last decade have either stagnated or worsened. India is not only home to the largest number of billionaires outside the US. It is also home to large numbers of poor, of hungry and malnourished, of child labourers, of people defecating in the open, of those without access to safe drinking water, of illiterates and so on.
Clearly, all these would not have been possible without the invisible hand of crony capitalism.
After all this, did you really think that the reforms were meant to remove the licence-permitraj? Or that the government is seriously committed to inclusive growth?
Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.
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First Published: Tue, Dec 07 2010. 08 59 PM IST