Tuesday, October 25, 2011
Building India Inc
A weak state has given rise to a new kind of economy. Without reform, it will hit limits
WITH the Western way of doing things under siege, India’s rise offers a dollop of reassurance to anyone who believes in the combination of democracy and capitalism. It is a superpower-in-waiting whose people vote, whose society is raucous, and whose firms are red-blooded and striding onto the world stage. The contrast with China’s authoritarian capitalism is one that fans of laissez-faire find comforting. Some see an echo of America’s freewheeling approach, with spicier food and worse roads. But that view is a delusion, as our special report explains. For while India’s capitalism does have oodles of vim, it is writing its own rules, some better than others.
Mumbai, as seen from Mars
Some Indian firms have, admittedly, followed an American-style fairy tale. Infosys, a technology firm, leapt in a generation from a start-up to a global blue chip, owned by institutional shareholders and measured against that most Western of yardsticks, the stock price. Yet this is the exception, not the norm. A Martian investor landing on Mumbai’s streets of gold might judge its business scene a mix of São Paulo, Seoul and Shanghai, with only a dash of Silicon Valley.
In Western economies well over half of stockmarket profits are from firms controlled by institutional investors; in India only an eighth are. Instead capitalism is skewed towards the state and business houses (conglomerates usually controlled by families and family trusts). Government—grumpy, doddery and sometimes bent—still looms large. State-backed firms, similar to China’s, make 40% of stockmarket profits and dominate energy and finance. A vast number of other public-sector entities, some of them decrepit, often create bottlenecks. These are the remnants of India’s Fabian nightmare.
India Inc’s newer companies rose after a burst of liberalisation back in 1991. In its wake foreign firms piled into industries such as consumer goods and carmaking, drawn by a big pool of labour and customers. Between 1995 and 2003 superb new local entrepreneurs made fortunes in the sunrise industries of telecoms, air travel, technology and health care.
The revolution also hit the traditional business houses. Many flabby outfits declined. Yet plenty fought back, becoming much more professional outfits. Thus alongside stars born in the 1990s, such as Bharti Airtel, a mobile-phone firm, older conglomerates such as Reliance Industries, Aditya Birla and Tata Sons still loom large in the Indian mind, their extraordinarily diverse output driven, eaten, worn and watched, their hereditary bosses as famous as film stars. Though mid-sized by global standards, they have entered the consciousness of foreigners too, with takeovers abroad, from Novelis, an aluminium outfit, to Corus, a steel company. The next rank down of business houses, such as Mahindra, are now going global too. India is exporting a corporate form which owes as much to South Korea’s chaebol, Japan’s keiretsu and Brazil’s barons as it does to a current American or European ideal of the firm.
Perhaps India is just at an earlier chapter of the Western script. In 1900 American industry was dominated by tycoons such as John Pierpont Morgan and John D. Rockefeller. Now, thanks to the need to raise capital from outsiders, antitrust probes and the absence or flaws of heirs, the remnants of their empires are dismembered and answerable to fund managers—as Microsoft and Apple already are.
Still, by that yardstick Indian firms have decades before institutional capitalism takes over. And their approach of being widely spread and tightly owned has lots of puff left. After the ructions of the 1990s the share of activity from family-linked firms has been stable for a decade. The few firms controlled by diffuse owners often bin their MBA textbooks and run as conglomerates too. First-generation entrepreneurs who made it in the 1995-2003 sunrise era are diversifying their groups and teaching the kids to take over. And although the biggest group, Tata, will move beyond its family when its heirless fifth-generation patriarch retires in 2012, it is in no hurry to break itself up.
This suggests there is in fact a logic to India’s favourite way of organising firms.
It makes sense for businesses to sprawl because the Indian state is still pathetically weak. Infrastructure is so awful that companies often build their own.
Courts are slow and sometimes corrupt, so contracts are hard to enforce and banks and businesspeople are inclined to stick with companies they know and trust.
Established business houses can use their muscle to expand into new areas, sometimes at the expense of newcomers. Fewer new firms have broken into the big league since 2003 and those that have done so have tended to be good at working the political machine.
Capitalism for a billion, not just billionaires
All this might seem a recipe for disaster. In Korea and Japan closely held and widely spread firms became slothful. So far India Inc has been different: its big business houses compete and innovate fiercely. Their returns on capital are neither pathetic nor outrageous and most are prepared to invest billions of dollars in the risky capital projects that India needs so badly.
The danger is that over time, without another bout of reform, sclerosis will set in. India’s firms mostly thrive in spite of the weak state; they need to make sure they do not thrive because of it. Already there are two worrying signs: the slowdown in new entrepreneurs breaking into the established order; and endemic corruption. Both clash with the aspirations of the masses, who want India to be a land of opportunity. The current popular fury against graft is aimed at politicians, but India’s oligarchs have often been on the other side of the deal and may be next in line to get a roasting.
Few dispute the uselessness of much of the state and the need for an Indian Deng Xiaoping or Margaret Thatcher to roll it back. Whether that reformer arrives soon to deliver better infrastructure, swifter justice and good governance is less clear. But businesses can still do their bit by cleaning up their act, loudly supporting reform and improving their own governance, which is often murky. India Inc has a huge amount to be proud of. Now it needs to venture into the unknown. The Economist
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