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Pratap Bhanu Mehta: When Business Bats Against Itself

Indian capitalism is the single biggest obstacle to further economic reform. It still inhabits a world of deals rather than rules

Published: Aug 14, 2013 06:49:44 AM IST
Updated: Aug 14, 2013 08:40:05 AM IST
Pratap Bhanu Mehta: When Business Bats Against Itself
Image: Amit Verma

Pratap Bhanu Mehta
Pratap Bhanu Mehta is president of New Delhi-based think tank Centre for Policy Research, and is a member of the National Security Advisory Board and the World Economic Forum’s Global Governance Council. His areas of research include political economy, constitutional law, governance and international affairs.

There is widespread consensus that India does not have a political culture propitious for business freedom. It fares poorly across all global indicators that measure ease of  doing business. The daily uncertainty, arbitrariness, obstruction and degrading humiliation that anyone trying to honestly do business in India faces is living proof of an institutionalised hostility to business. But contrary to widespread perception, the main source  of this hostility is not just the state. The evolution of Indian capitalism itself is in large measure  responsible for it. The bourgeoisie of this country has not come of age; when it complains  it squeals more like a sulking child than a confident class. Instead, it needs to ask  hard questions about why India is less pro-business.

When the history of India’s reforms is written, scholars will blame their slow pace on many factors: The vested interests of the state, the inability of politics to take economic arguments seriously, the anxieties of the middle classes that continue to depend on the state, the complexities of policy in an agrarian society, the wages of populism and the inherited baggage of socialist illusions. But one influence that will stand out is that of India’s capitalist classes. For it is now palpably clear that Indian capitalism, despite the developments of the 1990s, is the biggest obstacle to further economic reform. Individual capitalists are undermining the long-term prospects of a free economy for their own immediate short-term gain.

One of the principle objectives of reform is to reduce the discretionary power of the state so that the ground rules regulating economic transactions are open, clear, predictable, competitive and fair. Licences and production controls were only one aspect of this discretionary power; tax exemptions and a plethora of other regulations are its other facets. But apart from production, the government has to regulate industry on labour issues, environmental concerns, land permission and so forth. It is wishful thinking to suppose that you can have capitalism that is not thus controlled. The question is whether the regulation is sensible and predictable. The government often has its own interests in an absurdly regulated or an over-regulated but under-governed system. But Indian capital, rather than collectively fighting for rational regulation, spends its energies extracting its own form of rent from this misregulation. Industry uses inordinate resources in keeping its exemptions intact or manipulating rules to its advantage. While rational from the point of view of particular entrepreneurs, cumulatively, the politics of exemption-seeking impedes reforms. It reinforces the view that the function of the state is not to set fair rules, but to dole out selective benefits. Indian industry still inhabits a world of deals rather than rules.

Pratap Bhanu Mehta: When Business Bats Against Itself
Image: Getty Images
Indian capital spends its energies in extracting its rent from governmental misregulations

There are too many examples of this. Rather than lobbying for sensible environmental regulation, industry dissimulates by attacking the idea of environment itself or by quietly seeking exemptions. India’s infrastructure is at a standstill not just because the government is paralysed. It is also because many of the infrastructure players were more comfortable with a deal-based world: Their business model was premised on the expectation of inordinate returns, ability to renegotiate contracts and so on. Big business saw its interests as separate from business in general. They were allowed options to exit and hedge against all risks; they were given captive power, easy credit, cover against the exchange rate, etc. SEZs were an exceptional land grab raj in disguise. They could fight the state on everything. But it is really the small entrepreneur who suffered the brunt of the state’s anti-business bias. What we call reform has largely been pro-big business as opposed to business.

That the politics of exemption-seeking is widespread is not a big surprise. What is less remarked upon is the deleterious effect this has on the legitimacy of capital. Many have long argued that Indian capital’s idea of entrepreneurship consists not of making innovative products, but fleecing the state. This perception continues to be valid even after a decade of liberalisation. The net result is that the wider population does not see an attack on market forces as an attack on freedom, entrepreneurship and innovation. Rather, it sees it as an attack on graft. It looks at Indian capitalism as the creation of a corrupt system rather than, as industry would like to present it, the victim. The conduct of Indian capital is the biggest obstacle to the legitimacy of capitalism.

Pratap Bhanu Mehta: When Business Bats Against Itself
Image: Oliver Morris / Getty Images
The Rockefeller College at Princeton University is named after JD Rockefeller. In the US, capitalist money was invested for public goods

Capitalism survived in most places, in part, by socially legitimising itself. It was able to, for all its vicious faults, present itself as a perpetual innovation machine introducing new products and efficiencies, a source of expanding revenues that the state could then use for other social purposes, a mine of new knowledge that expanded the frontiers of technology.

In India, for a variety of historical reasons, capital started with low social legitimacy. But in the half-century since independence, it has not done much to enhance its credibility. At one level, it can be quite efficient. But at another, it has not excited romance in any sense. It is, some exceptions apart, not known for great innovation in manufacturing. It has not expanded the technology frontiers of production. It is not at the vanguard of design. You could argue that this is because its hands were tied by the hostility to business. But the fact is it has done nothing to get people excited.

Indian capital has been narrowly short-sighted. It never understood that good capitalism needs a good state. Instead, it tried to hitch its wagon to an ill-thought sensibility—“public bad, private good”. It was so simple-minded and general in its critique of the state that it threw the baby out with the bath water. By delegitimising a proper idea of the public, it denuded the very foundation needed to sustain it.  Someone once remarked that the trick in capitalism is to make one generation’s bad money serve another generation’s good. It has to take off the rough edges. In the United States, this took on the form of a massive investment in creating ‘public’ goods— universities, patronage of arts and so forth. It was capital acknowledging, perhaps hypocritically, that it needed to transcend a narrow and pinched-up instrumentalism.

Indian capital’s face, with a few exceptions, is narrowly instrumentalist. You cannot have liberal economics without creating a massive infrastructure of liberal culture, in the true meaning of the term. The economist Adam Smith also surmised that capital’s power is, in part, aesthetic. It is its ability to create a veneer of order and aestheticism that helps it capture the imagination. If the public sense of space and architecture has been a monstrosity, there has been nothing in private capital to inspire confidence. It too has bound the imagination by its penny pinching.

Much is made of the fact that Indian capital is increasingly delivering many services. But this is a double-edged sword. While these might be a palliative to failing public institutions, they are not sources of great support for private business. If anything, the experience of private institutions, while acknowledged as a necessity by many, is also a source of resentment.

As if this was not enough, capitalism has come to be associated with the most sordid kind of politics. Older capitalists had the good sense to manipulate politics but not become politicians. Now the lines are blurred. Indian capital has a sense that it has too many skeletons in its closet and operates with that sense of vulnerability. This has made it intellectually servile—a cowering bourgeoisie tailing politicians rather than an independent class articulating powerful ideas.   

As economic reform slows down, as the rate of growth decelerates and inflation creeps up, don’t be surprised if the very class that made the country rich in the ’90s becomes the target of a backlash. After all, if most people are convinced that capital’s success in India is not due to its virtues but is a result of its vices, few will come to its defence. If the politics of capital contributes to fiscal and market distortions, rather than correcting them, the economy will have little future.

Capitalism has this in common with democracy: Under both systems, you can fool some people all the time, all the people for some of the time but not all the people for all of the time. As Smith put it, capitalists are the biggest obstacle to capitalism.   

(This story appears in the 23 August, 2013 issue of Forbes India. To visit our Archives, click here.)

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  • Communal

    To alleviate poverty in India, governance must be really decentralized with will and wisdom. Every state in India should have their own currency.

    on Oct 23, 2013
  • Tushar Jambhekar

    Supermarkets or Boardrooms; Politicians or Commoners- Indians love deals. We are proud of a bargain on a kilo of onions rather than support towards establishing the robust infrastructure that can keep prices within bounds so every common man can buy them. The idea of selfish gains is well entrenched in our way of life; so much so that even governement policies or even traditional business is done with the same ethics. Until you hit a road block while doing business, rule books and policies never matter. If the going is smooth, it has always been \'aapna kaam banta; bhad mein jaye janta...\'

    on Aug 20, 2013
  • Pramod Reddy

    It is probably the sign of times, of angst about economic prospects, that Mr. Pratap Bhanu Mehta has now concluded that something is terribly wrong with the mindset of the capitalists in India, and that the capitalism that we see in India has emerged as one that fleeces the State, and the nation. Not too long ago, a little over 2 years, the Supreme Court in two historic judgments, one banning the use of SPOs (or commonly referred to as Salwa Judum), and the other on the issue of prosecution of Mr. Hassan Ali, who had been charged with owing the State Rs 60,000 to 80,000 crores, and yet the Enforcement Division had done little to investigate for next four years. In both the judgments, the SC had lamented the rise of what it called \"predatory capitalism\". Mr. Mehta\'s take at that time was that the critique by the Court would have been amusing but for the fact that it has far reaching consequences. At that time I thought that his comment was both intemperate, and revelatory of the Delhi mindset - that it knows everything. Yet, much that the Supreme Court had written was prescient about what Mr. Mehta has come to now conclude. In neither of those two judgments did the Sc advocate a return to Nehruvian Socialism, but very poignantly underscored the acute divergence of imperatives of constitutional governance as stated in the Constitutional text, and the practice of misgovernance. In Ram Jethmalani v Union of India, the Court had remarked that the State had become a \"soft state\" where the law makers, the law keepers and the law breakers were in an unholy alliance. In Nandini Sunder v State of Chattisgarh, the Court had remarked very exasperatedly that \"tax breaks for the rich, and guns for the poor\" was hardly conducive to long run stability. I can only hope that Mr. Mehta would go back and reread those two judgments, and reflect on his own role in critiquing them rather churlishly. Nevertheless it is good to see Mr. Mehta return back to his days of scholarship when he wrote \"Burden of Democracy\" and turn his back on his days writing apologia for misgovernance towards the late 2000s. Welcome back the real Mr. Pratap Bhanu Mehta. We missed you for nearly half a decade or more now when you had been seduced by the rhetoric of the politico-business class.

    on Aug 19, 2013
  • Sudheendra Batni

    Indian Business means fleecing the Government and making profits may be with the exception of Tatas,and very few others. In this fleecing,which ultimately means honest Tax payers,politicians to a very great extent and babus to smaller extent are all hand in glove.Any new rule or law means more avenues for extra chai paani for lower rung!

    on Aug 16, 2013
  • Sriram

    Very good analysis-correctly sums up the situation. The examples are there for all to see-difficult to name any Indian manufacturing company with world class design or an IT company which has successfully transformed itself into a world class IT product company....

    on Aug 15, 2013
  • Mohammad Chowdhury

    Interesting viewpoint and a point that I think applies to many emerging markets which continue to have inconsistent policy regimes in some sectors - 3-4 specific examples would really help bring it to light though.

    on Aug 14, 2013
  • Harsha

    I disagree. One of the principle objectives of reform is to reduce the discretionary power of the CENTRAL government and its skewed tax collection policies. We cant have high income generating states funding the poor over-populous corrupt states with their fancy welfare schemes. If the ground rules regulating economic transactions are open, clear, predictable, competitive and fair; then Central government has to stop playing big daddy and stick its nose into defense, foreign affairs etc.

    on Aug 14, 2013
    • Sudhir

      The biggest illustration of above mention issues is 2G spectrum allocation, alleged Wadra land deal and recent gas pricing in favour of big corporates or some particulars individuals. Those who have access to corridor of state, never wants the licence raj to be reduces. In recent years, I have never seen or heard of Reliance expressing dissatisfaction against any wrong or unnecessary rules of government and consequence of this, Small or new players never gets fair play ground. Both government and big corporates and preferred individual never wants to loose control over it.

      on Aug 15, 2013