A detox moment for India Inc.
The uncovering of the Rs11,400 crore scam allegedly perpetrated by jeweller Nirav Modi seems to be setting off a domino effect with more instances being reported by investigation agencies. The buzz is that this kind of infraction involving working capital is par for the course, though this is not true of the scale of the fraud pulled off at the expense of Punjab National Bank. Both the cause and effect of the latest scam suggest yet another manifestation of crony capitalism.
Interestingly, this episode came in the backdrop of an institutional push to fix the bad debt problem; it is estimated at a staggering Rs10 trillion—which is more than a third of the size of the 2018-19 Union Budget of Rs24.4 trillion.
While there were some genuine cases of unexpected disruptions forcing businesses to go belly up, there is a sense that an overwhelming number were an outcome of the cosy relationship between business, politicians and bankers—which gave short shrift to risk assessment norms.
Take the two together and it is clear that Indian business is facing a detox moment. Like any addiction, the process of weaning will not be easy. But the writing is on the wall: it is time for Indian business to abandon old practices, regardless of whether they have become a way of life, and embrace the era of a rules-based regime.
In fact, finance minister Arun Jaitley said as much at the weekend summit hosted by The Economic Times. Responding to a question, he said, “When I speak in terms of the ethical practices I think it is a significant problem in India. I would be glad that rather than always taking a close look at what governments are doing, Indian businesses and industry look inwards.”
Arguing in this candid vein, he added, “This was the Indian model (wherein) you create shell companies and round trip the money. This was a standard operating procedure that will be advised by an chartered accountant and has been going on for decades.”
To be fair to Indian business, it is the political ideology which puts them in this spot. And to be sure, you can’t paint all of Indian business with the same brush. Laudable while the ideology of self-reliance was, it created rigid structures within which it was impossible for business to operate unless they greased the wheels of a command-control regime.
In fact, for a long time in Bollywood films, businesses were cast in a negative role. Culturally too, business was viewed rather poorly.
All this began to change after the return of Indira Gandhi as prime minister in 1980. In fact, the basis for a rethink was laid in the decade preceding this when India’s intellectuals, realising the perils of sticking to a licence-control regime, engaged in intense debate to retool the ideological framework.
Unfortunately, as the government’s chief economic adviser Arvind Subramanian (in his earlier avatar as an academic) has pointed out, this mindset reset was pro-business and not pro-market.
In a co-authored paper published by the National Bureau of Economic Research Subramanian argues how understanding this distinction is key: “We make a distinction here between a pro-market and a pro-business orientation. The former focuses on removing impediments to markets, and aims to achieve this through economic liberalization. It favours entrants and consumers. A pro-business orientation, on the other hand, is one that focuses on raising the profitability of the established industrial and commercial establishments. It tends to favour incumbents and producers.”
Connect the dots and you know how this created the ground for the virtual stampede to garner rentier incomes that we witnessed in the late 1990s and the turn of the millennium.
With gradual liberalization in trade tariffs and foreign direct investment norms, together with freer domestic industrial policy rules, the country has started moving towards a pro-market regime. To its credit, the incumbent regime, at the cost of alienating its supporters among India Inc., has pushed harder for probity in public life.
Yes, some of the measures may be questionable given their less-than convincing economic rationale, but the intent has been what Jaitley described in his budget: Restoring the premium on honesty.
The implicit sub-text is that a shift to a rules-based regime is irreversible (the institutional approach to deal with the bad debt problem and the roll-out of the goods and services tax are good examples).
It is a tough moment for India Inc. Will it measure up to the challenge?
Till then, India’s future hangs in the balance.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus.
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