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Has India’s Gilded Age Lost Its Luster?

Alec Foege | Special to CNBC.com
Monday, 5 Nov 2012 | 2:27 PM ET

Jayant Sinha was a management consultant in India for McKinsey & Company in the mid-2000s when he observed first-hand what seemed to be an extraordinary imbalance of wealth in his native country. He determined it was having a negative effect on India’s economic future.

Sinha, who holds an MBA from Harvard University, later furthered his research as a hedge fund investor in India for Courage Capital Management. “I compared the net worth of India’s billionaires versus national GDP,” he said. “It was the first time it had been done.”

He discovered that India’s billionaires’ aggregate wealth equaled 31 percent of its gross domestic product, as compared to the United States, where U.S. billionaires’ wealth was equivalent to just 12 percent of GDP.

From 2008 to 2010, Sinha wrote a series of columns for Outlook India magazine, then co-wrote a couple pieces for London’s Financial Times, describing what he observed through his research as India’s Gilded Age. He called out the nation’s billionaire oligarchs for engaging in what he called crony capitalism. “I compared what happened from 2004 to 2011 in India to the robber baron era in the United States in the late 1800s,” he said.

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The comparison resonated. Since then, both Indians and international observers have become more aware of illegal mining, land scams, coal allocations and telecommunication spectrum allocations that have helped a handful of Indian billionaires become even wealthier, thanks to their cozy relationships with government officials.

Eventually, thanks to a high-profile squabble between Mukesh and Anil Ambani — billionaire brothers who preside over India’s leading oil and gas concerns and its top telecom and financial services companies, respectively — the international image of India’s hedonistic, wealth-laden ruling class was solidified.

The spat was over the division of Reliance Industries , the conglomerate founded by their late father, Dhirubhai Ambani.

The world's first 10-figure residence

In 2010, when Mukesh Ambani, India’s richest individual, unveiled his $1 billion, 27-story home in Mumbai — the world’s first 10-figure residence — it served as a fitting cap to India’s robber-baron bubble. Indeed, Forbes reported in early 2012 that the number of Indian billionaires dropped from 55 the previous year to 48, with a net worth of $246.5 billion.

Included in those ranks are steel titan Lakshmi Mittal, the second-wealthiest Indian; and Azim Premji, chairman of Wipro , a multinational IT corporation, who is No. 3 on the list.

Jayant Sinha says publicity has impacted efforts to reform some of the governmental policies that permit India’s oligarchs to profit from natural resources technically owned by the Indian people. “The middle class and voting population has been roused against this kind of behavior,” he said. He cited, for example, the emergence of grass-roots organization India Against Corruption.

He also said India’s Supreme Court and Comptroller General have become “much more active” in putting in place laws to prevent some of these practices.

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Sinha argued that some foreign institutional investors “have realized that projects they thought were above-board are not.” And while few if any hedge funds, sovereign wealth funds or pension funds have pulled investments out of India so far, he believes there is an investment opportunity for those who take time to research which Indian companies are built on solid growth strategies — and which are being propped up by eroding corrupt policies.

That’s not to say India’s oligarchs are considering becoming better corporate citizens for purely humanitarian reasons. “I think that all of them have realized that to create the right business environment, you need to show some corporate responsibility,” said Sandeep Shastri, vice chancellor of Jain University in Bangalore and coordinator of the Lokniti Network, a Delhi-based research organization devoted to promoting democratic values in emerging economies.

How to end the Gilded Age

While he acknowledged that the public debate has prompted some oligarchs to increase their social involvement, Shastri says these powerful figures need to take a more systematic approach to helping India’s less fortunate. “I was at a meeting recently where lobbyist groups were listing all their social contributions, and one young lady stood up and said, ‘Somebody should ask us what we would like help with.’”

Sinha, in his current role as a partner with Omidyar Network, a philanthropic investment firm started by eBay founder Pierre Omidyar and his wife, Pam, has determined some ways to help end India’s Gilded Age, then help it evolve into a more progressive economic era.

At the top of Sinha’s list is taxing the transfer of extreme wealth from generation to generation. “There is no estate tax in India, which allows wealthy families to keep compounding their vast fortunes,” he says. “Estate taxes make a huge difference.”

Another area he sees as ripe for reform is the government’s policy on land acquisition. He puts the blame on the 1894 Land Acquisition Act, which began as an eminent domain law allowing the government to seize private land for public purposes. Sinha says the “obsolete” law has abetted a web of kickbacks and payoffs that taken public land from the people and converted it for industrial purposes.”

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But the most egregious area for abuse, in Sinha’s view, is the rampant illegal mining of natural resources, such as coal, a situation that has enriched the oligarchs virtually unchecked. “There are parts of India that are not in control of the Indian government,” he says. “Companies just put coal into trucks and then ship it to China. Anything connected to natural resources is abused.”

Still, Sinha believes that the winds of change are blowing stronger than ever. “I’m very hopeful,” he says. “We are living in the Internet era, and everything happens very fast.” He points out that more has been done to destabilize India’s oligarchs in the last five years than in the previous 10.