ON AUGUST 1ST India’s finance minister, Pranab Mukherjee, gathered the country’s senior businesspeople for a pep-talk in New Delhi. The event (pictured) was notable for two reasons. First, the subject of discussion was the wobble in confidence that has taken place over the past year. Although a mini-industry has arisen of India optimists who predict that the country’s entrepreneurial spirit will make it an economic superpower over the next two decades, many business folk on the ground feel disillusioned. They worry that India’s notorious red tape, graft and lack of infrastructure are finally catching up with it. Largely unnoticed abroad and eclipsed by the rich world’s sovereign-debt crisis, the Indian economy has hit a sticky patch, with investment slowing, inflation high and growth expected to dip to perhaps 7%, from a peak of 10%. After two and a half hours, needless to say, the bosses emerged and expressed boundless optimism with the gruff air of men in the grip of a half-Nelson.
The second surprise, given India’s reputation as a land of red-hot start-ups and new entrepreneurs, was the dynastic nature of those captains of industry. They included Ratan Tata, the fifth-generation head of Tata Sons, a conglomerate; Anand Mahindra, the chief executive of the Mahindra group, which was co-founded by his grandfather; and Anil Ambani, who inherited a chunk of the Reliance empire built by his father. The main representatives of first-generation entrepreneurs were Shashi Ruia, who built the Essar group with his brother and who has handed day-to-day management to his son; and Sunil Bharti Mittal, who controls India’s biggest mobile-phone operator, and whose son recently joined the firm after a stint as an investment banker in London. True, not all Indian firms are dynastic: Y.C. Deveshwar, a veteran business leader, attended in his capacity as chairman of ITC, a firm controlled by institutional investors, rather than a family. But ITC has become the kind of conglomerate that Western textbooks advise against, spanning everything from stationery, cigarettes and spice-grinding to noodles and hotels.
Amid the barons and conglomerate bosses, the only man who represented a recognisably contemporary Western vision of the corporation was N.R. Narayana Murthy, the lead founder of Infosys. It is focused on one business line, computer services, which are mainly sold to rich countries. And it is owned by diffuse institutional shareholders, has gold-standard corporate governance and accounting, and in the next four years is expected to wave goodbye to the last of its founders still playing an executive role. It is a corporate fairy tale: in a single generation Infosys has leapt from a start-up, founded by a handful of engineers with $250, to global blue-chip company. The Infosys vision of Indian capitalism was popularised by Thomas Friedman, an American journalist who had an epiphany after playing golf in Bangalore and meeting Infosys’s chief executive. Mr Friedman went on to write the 2005 bestseller “The World Is Flat”. It described an India of buzzing entrepreneurs and start-ups, turbocharged by the internet, outsourcing and global communications—a kind of giant Silicon Valley with worse roads and spicier food. In the years since, perhaps reflecting the woes of the West and the rise of China’s state-backed approach, some observers have been less restrained, celebrating a reassuring India of a billion innovators who, through a bottom-up revolution, would propel their country to prosperity.
Cheerleaders hoped India could leap from sclerotic socialism towards a Western form of institutionally run capitalism. But that is not how things have turned out
Just as Lenin hoped Russia could skip a Marxist phase or two and jump from agriculture to communism, so these cheerleaders hoped India could leap from sclerotic socialism, which prevailed between independence in 1947 and liberalisation in 1991, towards a Western form of institutionally run capitalism.
But that is not how things have turned out. Infosys has just been overtaken as India’s most valuable computer-services firm by TCS, part of the 143-year-old Tata group. Look at India’s leading 100 firms by market value and you will not see any others like Infosys—blue-chip, focused, diffusely owned, created in the past three decades and run on non-hereditary principles—bar a few financial firms. And whereas Mr Friedman cited “software, brainpower, complex algorithms, knowledge workers, call centres, transmission protocols [and] breakthroughs in optical engineering” as the new sources of wealth, many of the latest generation of Indian oligarchs made their cash from old-fashioned things like roads, mines, energy and property. In short, India has not conformed to anyone’s template. It has gone its own way.
What does this new kind of capitalism look like? An immense, often unrecorded informal sector employs the majority of Indians. But in terms of value added—a crude way of measuring activity that is used by economists—Indian capitalism is 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 that companies in two states, Maharashtra and Karnataka, which host the commercial hubs of Mumbai and Bangalore, collectively accounted for about half of output.
Next, look at the stockmarket. It is not an ideal proxy for India Inc, but it is the only reliable one. About 70% of its value sits in the BSE 100 index of the largest firms, the smallest of which is worth just under a billion dollars, below which a firm is considered a tiddler by global standards. As a group, these businesses have a return on equity that has declined in recent years but remains solidly in the mid-teens, making Indian firms more profitable than many of their Asian peers, reckons Anirudha Dutta of CLSA, a brokerage. Debt levels are low and growth has been strong, with profits rising sixfold since 2001 in dollar terms to $64 billion.
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