India’s Neo-Capitalist Venture

Whilst Western Capitalism has been heavily attacked on its austerity measures, political indecision and heavy burdened debt problems, India’s rise has shown some glimmer of reassurance that Capitalism is not all but gone. The venture may not adhere to the conventional capitalist American model or China’s state-capitalist economy. Nevertheless, their 2nd quarterly GDP growth rate of 8.20% – their weakest over the six quarters, yet better than expected – shows that entrepreneurial spirit of risk taking factors, coupled with shrewd innovation, can reap the rewards that Westerns had so long ago had. Despite this Epicurean economic success, their success has drawn costs which highlight their underlying Aristotelian welfare failures, such as huge inequality divides and poverty. Hence, Milton Friedman’s phrase, “There is no such thing as Free Lunch”.

The main positive outcome of India’s venture is economic growth which is driven by three factors. First is the private, informal, sector which employs the majority of Indians, which have “value added”, creating Indian capitalism at its most concentrated. In 2007, a government survey of almost 200,000 services firms, formal and informal, concluded that the top 0.2% of them accounted for almost 40% of output, and firms in commercial hubs of Mumbai and Bangalore collectively accounted for about half of output. The willingness to take on informal labour incentivises labour itself to work hard and provide for their family. An industrious labour tends to increase productivity, and thus increase firms’ profit.

Secondly, about 70% of the stock market’s value sits in the BSE 100 index of the largest firms, the smallest of which is worth just under $1 billion. These firms have a return on equity that has declined in recent years but remains solidly in its firm mid-adolescence, making Indian firms more profitable than many of their Asian counterparts. In addition, debt levels are low and growth has been solid, with profits rising since 2001 to $64 billion.

The final factor is ownership. Until 1991, when liberalisation began, Indian businesses that had not been nationalised were family affairs that survived in micro-management. Firms responded by branching out into any activity where they could find space to innovate, while facing little competition in their main businesses. Many firms benefited from close links with the Congress Party, which formed India’s first post-independence government and still dominates the ruling coalition today. By the time the economic crisis hit liberalisation in 1991, though, most businesses were mainly exasperated.

The pattern of ownership in the second period, between liberalisation in 1991 and 2003, was far more unstable, as traditional family groups were exposed to fierce domestic and foreign competition, and the prices of everything from machinery to India’s currency were freed up. Of the largest 20 listed on the stockmarket in 1990, only five remain in a recognisable form in the top 20 private firms today, ranked by market value. The big textiles firms that dominated the scene in 1990 diminished over the next decade and some of the renowned families behind them such as the Mafatlals dropped from the upper ranks of capitalist clans. Indian businesses, in their first decade of freedom, acted like Shiva to destroy, and acted like Brahma to create. Indeed, as the economy took off in 2003, economists thought that the oligarchic form of capitalism might be wiped out altogether and perhaps even be replaced by an American-esque freewheeling approach.

To conclude on India’s organisation of firms, there is a logical thinking underneath. It makes sense for businesses to spread out because the Indian state is still weak. Infrastructure is so insufficient that even private firms must 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 firms they trust. Established well renowned business houses can use their power 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 persuading the politicians.

Yet India has its problems. The 31st October 2011 marked the first Formula One Grand Prix held in India – an image in striking contrast to one where calves rest upon untended rubbish heaps, lying near to distasteful £300 million racetrack, itself fringed by a 60-acre golf and spa resort. Consider these two perspectives: on one hand, a perception of redemption is being driven by this grand prix as a source of public self-confidence, of restoring public faith in Indian efficiency with an ‘on-time, on-budget’ showpiece just one year after Delhi’s chaotic Commonwealth Games. On the other hand, India’s poverty is not going away: it is unanswered and still remains a pressing issue in India. To extrapolate this further, one could say that India’s hunger and focus to build a self righteous image has made it ignorant to such humanitarian matters.

Poverty, as noted, is a big issue. In 2010, 20% of inhabitants in rural areas and 22% of inhabitants in urban areas lived below the poverty line. With population growth up to 1.2 billion, however, it is proving increasingly difficult to reduce the number of poor at a rapid pace. So despite India bringing down its poverty rate, more than 300 million people remained in poverty. However, Indian Planning Commission recently recommended placing India’s poverty line at 32 rupees (65c/40p) a day. Tushar Vashisht and Matthew Cherian conducted an experiment on living on this minimum amount. According to 26-year-olds, the plan would have damaging long-term effects for poorer people. Such a daily budget would lead to malnutrition in terms weight loss, fatigue and skewed blood sugar levels. Adding to that, the commission’s calculations overlooked mobile costs as well as not adjusting it to inflation. Hence, this plan is flawed and must be rectified before empowered.

In the final analysis, India’s Neo-Capitalist Venture is innovative and rewarding. For instance, the existence of major shadow sectors, private-provided infrastructure and family dominant firms certainly provided a strong scaffolding of India’s plc. It is evident that India is building a westernised image of prosperity with subtle spices of Indian values. However, outside its scaffolding a large pile of unsolved social problems has built up. For example, loose regulation has led to a series of corruption scandals, overlooking poverty has questioned India’s spending policy and increasingly wider inequality has made the poorest of the population stare into false hope. Nevertheless, India’s style has given hope and belief that Capitalism, unlike Soviet Socialism, will not break down without some resistance.

Contributed by Wafiq Islam