Profile: Ajay Shah co-leads the Macro/Finance Group at the National Institute of Public Finance and Policy in New Delhi. Before this, he was a consultant in the Mini-stry of Finance’s Department of Economics. He has engaged in academic and policy-oriented research in economics and finance.
The corruption scandals of recent years have thrown a spanner in traditional ways of doing business in India. That murky ways of doing business are much less feasible is something to rejoice over. But equally important is the challenge of constructing new structures that are impartial, efficient and supportive of growth. The way forward lies in clarity of objectives, focusing the government on market failures and refraining from arbitrary meddling, and ensuring accountability.
In the bad old days, India had a mix of badly structured government rules and procedures, coupled with large scale corruption. In areas which required a strong interface with the government, many success stories in the world of business had murky ways of getting things done. When foreign investment and private equity surged into the country 2002 onwards, this capital was often quite amoral. They cared about getting returns and not about the means through which returns were obtained.
With this wind in their sails the strongmen of Indian business thundered ahead. Their ranks were augmented by many wannabes who saw the opportunities available by flouting rules, getting things done, crushing rivals through illegal methods, and getting to the prize of billion-dollar valuations offered by private equity or FIIs.
From 2002 to 2008, we got the greatest macroeconomic boom in India’s history, but alongside it, we also got some of the most dangerous behaviour by strongmen and their counterparts in the government. By 2007, many people started getting concerned about whether India would fall into the ‘middle income trap’, which has been observed in many other developing countries where government and business cosy up in corrupt arrangements, kill off honest businesses, and settle into cosy stagnation.
This picture has changed quite a bit in recent years. While enforcement mechanisms in India are not perfect, it is also the case that not all enforcement can be bought off. One by one, we are seeing a procession of companies crashing and burning as skeletons come out of the closet.
Of great importance is stock market performance. The companies that have got into trouble in this fashion have produced phenomenal underperformance of the broad market. Sometimes, we see 50-70 percent fall in returns in a short time after an enforcement action. At other times, we see sustained long-term failure to deliver returns.
These messages have got to Wall Street. The same private equity and FIIs who blindly supported strongmen are now very concerned about ethical standards. A new line of business has opened up, in serving these investors, of doing ethics checks in India. But what about the apparatus of government?
The strongmen in business were exploiting opportunities that were present in a malfunctioning government. On one hand, this is about messy processes with a lack of clarity, a lack of rule of law and arbitrary decision-making. In addition, even when these processes are operated by a clean organisation, there are serious concerns about the inadequacies of our state apparatus.