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Prime Minister Modi and Mukesh Ambani in a conversation | indiatvnews.com

A year ago this month, corporate titans around the world celebrated the victory of Narendra Modi’s Bharatiya Janata Party (BJP) in India’s elections. In a country where radical leftists still exert a mighty influence in some states and on the intellectual center of gravity, Modi’s platform was unapologetically pro-business. But to make India more friendly to the free market, Modi has had to step on the toes of some of the same business leaders who backed him.

Modi, before becoming prime minister, as  chief  minister of Gujarat was widely seen as presiding over one of the most business-friendly state governments in recent memory. Many of India’s top CEOs all but openly backed Modi and the center-right BJP last year. The result was a landslide victory in which the long ruling center-left Congress party was ousted from power. Now, however, some of these same business leaders have changed their tune, and there are more than a few grumblings of dissatisfaction.

In February, Deepak Parekh, chairman of Housing Development Finance Corporation (HDFC), a major financial institution, complained of “a little bit of impatience” regarding what he saw as the lack of change on the ground in the business environment. In March, following the budget, Anil Manibhai Naik, chairman of Larsen & Toubro, a major engineering and construction conglomerate, said that the government’s steps to revive the economy were not “adequate”. And, last month, Harsh Mariwala, chairman of consumer goods group Marico, took to Twitter to argue that the “sheen is falling” off the Modi government in the context of its promises and slow delivery.

What explains this backlash?
In the years of a tightly controlled, largely closed, and centrally planned economy, there was a cozy nexus between top government ministers, bureaucrats, and business leaders. The latter needed government largesse in the form of licenses and other clearances to operate their businesses. These business leaders, known informally as the “Bombay Club,” actively lobbied against economic reforms, which would have challenged their market dominance.

Privileged positions
After India’s economy opened up in 1991, these cozy ties didn’t just disappear. Rather, in a poorly regulated and opaque environment in which politicians and bureaucrats continued to operate with considerable discretion rather than under fixed rules — especially in the many sectors that remained heavily regulated by the government — proximity between business and political leaders, and sometimes also with the connivance of senior members of the media establishment acting as go-betweens, remained as important as ever. Moreover, many of these business leaders or their heirs are still key players today.

It’s a further irony that such crony capitalism thrived in the 10 years of Congress rule from 2004-2014, a government which in theory was leftward-leaning and billed itself as pro-poor, not pro-business. In one striking instance, the government put forward a proposal to open foreign direct investment in multi-brand retail which they quickly withdrew when faced with opposition from large domestic retailers whose privileged positions in the market would be threatened. The government then re-introduced the proposal when these same big domestic retailers opportunistically changed their position as they realized they wouldn’t thrive without large infusions of foreign investment.

One of the reasons for the Congress’s crushing defeat last year was the widespread perception that large-scale corruption scams got out of hand under their rule. The largest of many scams surrounded the allocation of second generation (2G) spectrum for mobile telephony and the allocation of coal blocks to mining companies, both of which were accomplished not by transparent auctions but via the discretion of the government. The 2G scam led to the jailing of the minister responsible and the arrests of several corporate officials implicated by the Comptroller and Auditor General, an independent government appointed office, while the coal block allocations were canceled last year by India’s Supreme Court. Further legal proceedings against a range of accused, including former Prime Minister Manmohan Singh (who was also coal minister), are currently underway.

Since coming to power, Modi’s government has increased transparency considerably, with the coal auctions in particular being a model case: all of the bid activity and the final allocations can be tracked online. While such impartial, rules-based auctions benefit the economy, they clearly aren’t good news for those who used to enjoy privileged access to lucrative opportunities under a discretionary system.

Increasing transparency
It’s noteworthy that many of the private complaints about the Modi government come from industrialists in sectors like power and natural resources whose companies are carrying heavy debt burdens. These are precisely the sectors, which economists call “rent-thick,” which benefited the most under the old discretionary system and are hurting under Modi’s new government.

To be sure, increasing transparency and ending crony connections in sectors like power and natural resources is a hugely important step in the right direction. To be sure, increasing transparency and ending crony connections in sectors like power and natural resources is a hugely important step in the right direction. But cronyism and lack of transparency still permeate India public life, while a host of shady business among senior politicians, bureaucrats, business leaders, and even journalists, goes undisturbed.

As reported late last year, Reliance Industries, India’s largest multinational enterprise by revenue, which is headed by India’s wealthiest individual, Mukesh Ambani, paid substantial legal consultancy retainers to senior politicians, each of whom later became a minister — the first in the previous Congress government and the latter in the current BJP-led government.

The payments ceased when the members of parliament became ministers; but there is nothing illegal under current Indian disclosure laws for back bench MPs to receive payment from private corporations and no requirement to make public such payments. While there’s no suggestion of any wrongdoing by any of the parties involved, these arrangements clearly create the impression of a conflict of interest.

Quite apart from hiring MPs on retainers, senior industrialists like Ambani and his younger brother, Anil — who carved up a family business empire inherited from their father — have long enjoyed ready access to the top levels of government. Before becoming prime minister, Modi was widely seen as being close to Mukesh Ambani, but since his election victory has publicly distanced himself.

The dissatisfaction of senior business leaders with the Modi government is for the most part a good development. Of course, both domestic and foreign industrialists and investors have legitimate gripes, such as uncertainty and confusion over the tax regime. Concerns about retroactive taxation on foreign investors and the so-called minimum alternate tax which was slapped unexpectedly on several foreign investment funds went so far as to elicit an op-ed by Finance Minister Arun Jaitley trying to persuade investors that India was still a good place to put their money.

But when complaints about the government and business leaders take the form of protesting a lack of access, what that suggests is an attempt by the Modi government to break some of the mechanisms through which crony capitalism has operated.

Monopolies and protectionism
As noted earlier, some of the most enthusiastic supporters of India’s tightly controlled planning system were businesses which benefited by being awarded monopoly licenses. A consumer dealing with a private business in those days was almost like dealing with government bureaucracy. Almost a quarter century after India liberalized its economy, consumers have many more choices now, but the quality of service remains poor and bureaucratic rather than consumer oriented. One main cause for this poor service is that, despite all the reforms, many sectors of the Indian economy remain dominated by plodding monoliths, rather than the fiercely competitive industries in mature advanced economies like the United States. Indeed, last year, India dropped eleven spots in the Global Competitiveness Index of the World Economic Forum, to 71 out of 144 countries. The report noted, in particular, that distortionary economic policies, the prevalence of monopolies, and protectionism had helped to bring the ranking down.

What’s more, a largely dysfunctional bankruptcy code which awaits a reform promised by the Modi government means that very rarely does a firm actually go bust. This again doesn’t foster a competitive sink-or-swim business environment. It’s this lazy business culture, a holdover from the days of the Bombay Club, that Modi really needs to change if India is to become a truly modern economy.

Modi’s critics often unfairly criticize him as being pro-big business. But his government’s attempt to break down crony capitalism suggests the opposite — what Modi must also become, however, is an advocate for the individual consumer. After all, as we’ve known at least since Adam Smith, what’s in the best interests of business isn’t always the same as what’s in the best interests of the individual — and “business friendly” isn’t the same as “market friendly.” Nor should Modi or his economics team hold themselves captive to the vagaries of the day-to-day fluctuations of the markets, which scream from the headlines of business publications. Rather, it’s on the big picture — reforming the country’s economic and financial architecture — that Modi and his team should stay firmly focused going forward.
(courtesy: foreignpolicy.com)