The Latin Americanization of India?

There was a time not too long ago – actually it was no more than a few weeks in the past – when the tycoon class was celebrated as the frontiersmen of the Indian Century.  Growing Indian representation (69 at last count, the third highest number in the world) on the Forbes list of the globe’s dollar billionaires was a matter of national pride.  The swashbuckling mergers and acquisitions they pulled off around the world were cheered as advancing Indian interests.  The domestic emergence of a luxury goods sector catering to the richy rich was taken as another mark of the country’s increasing weight in world markets.  In recent weeks, for example, the world’s fastest car – the Bugatti Veyron 16.4 Grand Sport ($2.7 million price tag) – hit Indian roads, and a European fabric maker announced plans to begin selling the world’s most expensive men’s suit ($113,000) in India.

The public’s fascination with tycoons reached a high point with the November 25^th  house-warming party that Mukesh Ambani, the country’s richest man, threw at Antila, his palatial (400,000 square feet) and opulent (mother of pearl flooring!) new residence in South Mumbai.  The 27-storey home, with an estimated value of $1-2 billion, is seen by some as an emblem of the new India, one that is increasingly self-confident, assertive and even a bit ostentatious.  Thought to be the world’s most valuable private abode, it was lauded on the front page of The Times of India as “the Taj Mahal of the 21^st Century.”

Yet the telecommunications scandal that exploded in late November and is now rocking India’s political class has also dented the reputation of business elites.  The leaked telephone conversations of Niira Radia, a prominent business lobbyist, reveal some of the country’s most powerful tycoons scheming to manipulate government appointments and influence regulatory decisions.   Suddenly critical questions are being raised about whether outsized fortunes have bought undue influence, whether the relationship between the state and the corporate sector is too cozy, and whether the nation’s wealth is concentrated in the hands of too few.

Although the economic reforms of the last two decades have lifted hundreds of millions out of Dickensian poverty, it has also produced stark disparities in wealth.  Virtually every Indian is now richer than in 1991, though the incomes of the poor have increased at a slower pace than overall per-capita income growth.  (And it must be said that improvement in non-income indicators of poverty has been even less impressive.)  But the wealth of the richest has risen spectacularly, so much so that the combined wealth of the country’s billionaires is equivalent to more than a fifth of national GDP – a figure that is higher than in China despite that country having more billionaires.  Raghuram Rajan, an economic advisor to Prime Minister Manmohan Singh and former chief economist of the International Monetary Fund, reckons (see here and here) that India likely has the highest concentration of billionaires per trillion dollars of GDP – a rather dubious distinction given that Russia is in second place.

A 2009 study by the Asian Development Bank (ADB) (also see here) raised the prospect of the country’s “Latin Americanization,” by which it meant, among other things, the consolidation of oligarchic capitalism, with major family-based corporations wielding disproportionate influence over markets and the state.  The report pointed as a cautionary tale to the case of Mexico, which enjoyed marked economic dynamism from the 1950s to the early 1980s.  But growth in more recent decades has been inhibited because large family-based corporate structures have succeeded in capturing corruptible state institutions.  As the study made clear, oligarchic capitalist structures can play a valuable role in the early stages of economic development by generating large productivity gains and creating globally competitive firms.  But at some point, they begin to choke off growth. 

So, are stark disparities in wealth and oligarchic capitalism taking root in India?  The warning signs are mixed.  Based on development patterns elsewhere, growing wealth inequality is to be expected in a rapidly-growing emerging economy like India’s, as some sectors and areas enjoy greater prosperity before others do.  For instance, wealth accumulation typically occurs in urban regions sooner than in the rural areas where the large majority of Indians live.  Further, according to research by Credit Suisse, the bulk of the nation’s wealth is concentrated at the lower end of the wealth pyramid.

Standard international comparisons of economic inequality have traditionally pegged China as a more unequal nation than India.  But Pranad Bardhan, a well-respected economist at Berkeley, has presented evidence that inequality is much greater in India than previously thought, surpassing even that in China.  And it bears mention that Indian government statistics, on which international comparisons are based, most likely underestimate inequality.

Moreover, a disturbingly large share of billionaire wealth in India comes from sectors where state control is the heaviest – such as natural resources, land and sectors involving lucrative government contracts.  The ADB report estimates that about 80 percent of total billionaire wealth in 2008 was derived from these sectors.  Adding to the sense of an emerging plutocracy is that many of India’s corporate elites are second- or third-generation tycoons who come from established business families with long-standing connections to the state.

But the real scourge lies in the paradoxical character of the Indian state.  Even after the much-touted economic liberalizations introduced two decades ago, it continues to wield excessive control over wide swathes of the national economy.  India ranks 124^th among the 183 countries surveyed in the Heritage Foundation’s frequently cited Index of Economic Freedom, right between Cote d’Ivoire and Moldava and not far from China’s 140^th showing.  And yet at the same time the state is weak, susceptible to influence by vested interests and lacking robust regulatory structures.

Rather than cast India’s super wealthy as this era’s robber barons or malefactors of great wealth,  a more salutary response to concerns about concentrated wealth and influence would be to enact deeper reforms of the Indian state, including dismantling the remnants of the “License Raj” that continue to inhibit economic growth.  Also needed is greater regulatory independence and transparency to ensure more competitive markets.  On this score, a key indicator to watch for is the impact that the newly-empowered Competition Commission of India is having on corporate behavior.