India: Bollygarchs at Bay
As India’s growth slumps, delegations of aggrieved business titans are becoming an increasingly common sight in New Delhi.
Last month the heads of four of the nation’s largest telecommunications groups, including Vodafone chief executive Vittorio Colao and Sunil Bharti Mittal of Airtel, visited the capital to complain about growing regulatory confusion in their industry.
Their journey follows repeated trips this year by leading industrialists, such as Tata group head Ratan Tata and Anil Ambani of Reliance, demanding action on stalled infrastructure schemes and fuel shortages in their ailing power plants. Mr Ambani’s elder brother, Mukesh, is having just as torrid a time, as his half to their family’s divided conglomerate wrangles with the government over plans to develop a large gasfield.
In public, these gatherings come with exhortations for reforms to boost the flagging economy; demands that seem newly prescient following last week’s alarming growth figures, which fell to just 5.3 percent in the last quarter , having nudged more than 9 percent a few years back. In private, their complaints are often more pointed. India is stalling, they say, because of “policy paralysis” that is hobbling investment, lowering still further the growth trajectory of the world’s largest democracy.
Yet such concerns hide a more subtle development, one with potentially profound implications for any recovery. These delegations include many of the most prominent and powerful figures in Indian business. Known as “promoters”, sometimes as “bollygarchs”, nearly all come with a reputation for deep connections within government and the ability to use them to break political logjams.
There was a time when their high-profile interventions would have yielded speedy results. Yet analysts say the recent spate of lobbying has achieved little. Instead, there is talk of fleeing to invest abroad – as when Lakshmi Mittal, head of ArcelorMittal , the world’s largest steelmaker, said last month that regulatory dithering would stop him delivering any large-scale new Indian projects in the next five years.
“The fact that India’s largest businesses are, as they sometimes put it, ‘politically hedging’ by planning to invest abroad is a big change that can be read in two ways,” says Pratap Bhanu Mehta of the Centre for Policy Research in Delhi. “You can read it as a critique of the government or you can read it as a lack of confidence in their own ability to move things in India any longer.”
Either way, the result is the same. The biggest industrial conglomerates are the engines that powered much of India’s roaring growth in the past decade. But, while their investment is needed more than ever to reverse the downward economic spiral of Asia’s third-largest economy, their power appears to be waning amid allegations of corruption, with projects held in limbo by regulatory delays and viewed increasingly skeptically by investors. A crucial component of the nation’s growth model is broken. Until it is replaced, global hopes of a speedy revival in one of the most important emerging markets seem ever more unlikely to be fulfilled.
Last week’s economic data only worsened the problems of a struggling corporate sector. The figures prompted a round of downgrades, led by Morgan Stanley, which cut its 2013 gross domestic product estimates for the second time in two weeks, this time to 5.7 percent. The projection, which would amount to a juddering slowdown in absolute terms, means India is likely to be outpaced by Asian rivals such as Indonesia , in the process losing its title as the fastest growing big emerging market after China.
Almost every one of its other vital statistics is also heading in the wrong direction. Inflation above 7 percent , in combination with slackening growth, is leading to talk of stagflation. The rupee has fallen to record lows, while interest rates, still high at 8 percent, make investment by businesses unattractive. India’s worryingly high current account deficit, projected to exceed 4 percent of GDP this year, and budget deficit (8.4 percent), provide little room for remedial monetary or fiscal action.
Some of the weak performance can be blamed on problems beyond government control, notably investor worries about the eurozone. This is where Manmohan Singh, prime minister, pointed the finger last week, speaking to journalists as he flew back from a state visit to Myanmar, referring vaguely to “the global economic scene”.
Economists tend to disagree, referring instead to Mr Singh’s failure in recent years to build on previous reforms to spur investment or attract foreign capital. Yet behind the slowdown lies another factor: a striking fall-off in corporate investment as business leaders either sit on their hands in hope of better times or find plans hindered by regulatory barriers.
“The number of new projects or new investments is at its lowest level for many years,” says Rajiv Kumar of the Federation of Indian Chambers of Commerce and Industry. “If you are thinking about investing in the power sector and you know that there are 20,000 megawatts of capacity that is stranded without adequate supplies of coal, you are going to think very carefully before adding to that.”
A fall in investment is to be expected as growth slows. But industrial leaders say a breakdown in relations between the business and political classes is exacerbating the problem.
“There has been a reluctance to decide things fast, a reluctance by government agencies to approve things quicker – they have not moved the way they used to,” says V.?Ashok, chief financial officer at the Essar Group, an energy and resources conglomerate controlled by the billionaire Ruia brothers. “This is where there is discomfort, the inability of the men who matter to decide things.”
The Ruias saw the value of a nod from New Delhi last week, when signals of movement on environmental clearance for a delayed coal mine in the central state of Madhya Pradesh led shares in London-listed Essar Energy to jump 20 percent. But examples of businesses previously adept at winning state approval and now stuck in regulatory limbo or bedeviled by investigations are not hard to find.
Many foreign businesses have fallen foul of India’s tricky regulatory system but analysts note that it is domestic companies in sectors dependent on regulation that seem to be struggling more than most. Those with weaker links to government, such as consumer goods or pharmaceuticals, are proving more resilient.
A stark example is provided by Ambit Capital, a Mumbai-based broker. Its “politically connected companies” index ranks 75 big Indian businesses with either “strong connectivity to the political establishment” or fortunes that rely on state licenses. For most of the past five years, they outperformed the 500 leading shares on the Bombay Stock Exchange. The pattern flipped last year, a trend that seems to be growing.
Corruption investigations partly explain new-found investor caution over politically linked business giants. The independent comptroller and auditor-general has made headlines investigating allegations of improper allocation of resources to companies, most dramatically when a leaked draft report in March claimed the government had lost out on $210 billion revenues by selling coal assets too cheaply. The supreme court has undone a series of policies, canceling 122 mobile licenses this year on grounds of improper spectrum allocation.
A ferocious media driven by deep public anger have played a part, too. “Newly assertive institutions such as the press, the [comptroller and auditor general] and the judiciary have started uncovering the massive nexus between the oligarchy and the politicians and bureaucrats that built up during the go-go years,” said Raghuram Rajan of the University of Chicago, an adviser to India’s government, in a recent speech.
This is not just an Indian story. In other leading emerging economies, such as China and Russia, increased transparency and growing anger over corruption have brought cozy relations between political insiders and industrial giants into question.
But India alone is burdened with the legacy of the “Licence Raj” that preceded the reforms that opened the economy after 1991. That system was replaced, says Prof Rajan, by a uniquely Indian “Resource Raj”, in which politically connected industrialists built empires by gaining access to public goods such as coal, minerals, land and telecoms spectrum.
It is this system that is unraveling, undermining in turn the ability to produce an investment-led recovery. While other factors have played a role – including high interest rates and lack of access to capital – in this era of more intense scrutiny it is ever harder to give access to resources to even the best-connected groups. This, in turn, has created an attitude of risk aversion in government, and gummed up much of the system of industrial investment.
In the long term, this is likely to be a welcome development, signaling a rejection of behind-the-scenes co-operation – a move that could be hastened by moves to a system in which all natural resources are openly auctioned at market rates. “Because of democratic public scrutiny, crony capitalism is bound to recede,” says Ashutosh Varshney of Brown University, “but its end will take longer.”
In the short term, the result is much less welcome: a toxic mixture of government inaction and business caution. Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission and an ally of Mr Singh, put the problem in stark terms in a leaked March memo, a copy of which has been seen by the Financial Times.
“Unfortunately, the prevailing atmosphere of suspicion and the fear of criticism?...?fed by hysterical press reporting, all too often leads to officials recommending the option least likely to attract criticism,” he wrote. That option is often to do nothing.
As world leaders look to emerging markets to restart global growth, this investment impasse adds yet more pressure to a becalmed government to rediscover its reforming zeal. Jairam Ramesh, the minister for rural development, called in an interview in The Economic Times last week for the nation’s Congress-led government to gets its act together. “The time for pussyfooting is over,” he said. “We still have two years left, and it is time to take the bull by its horns.”
Even as a once glittering growth story falters, there are few signs his colleagues are listening.