Narendra Modi Is Bad for Big Business

And that's a good thing -- particularly when Indias top CEOs

are getting mad at him.

BY RUPA SUBRAMANYA-MAY 7, 2015

Ayear ago this month, corporate titans around the world celebrated the victory of
Narendra Modis Bharatiya Janata Party (BJP) in Indias elections. In a country where
radical leftists still exert a mighty influence in some states and on the intellectual
center of gravity, Modis 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 Indias 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 governments 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.
After Indias economy opened up in 1991, these cozy ties didnt 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.
Its 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 strikinginstance, 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 wouldnt thrive without large infusions of foreign
investment.
One of the reasons for the Congresss 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 Indias 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, Modis 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 arent good news for those who used to enjoy
privileged access to lucrative opportunities under a discretionary system.
Its 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 Modis 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. 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, Indias largest multinational enterprise
by revenue, which is headed by Indias 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 theres 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 socalled 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.
As noted earlier, some of the most enthusiastic supporters of Indias 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.
Whats 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 doesnt foster a competitive sink-or-swim business environment. Its 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.
Modis critics often unfairly criticize him as being pro-big business. But his
governments 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 weve known at least since Adam Smith, whats in the best interests of business
isnt always the same as whats in the best interests of the individual and business
friendly isnt 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, its on the big
picture reforming the countrys economic and financial architecture that Modi and
his team should stay firmly focused going forward.
RAVEENDRAN/AFP/Getty Images
Posted by Thavam