More on this book
Community
Kindle Notes & Highlights
Read between
October 24 - October 24, 2018
From 2004 to 2014 India enjoyed the fastest economic expansion in its history, averaging growth of more than eight percent a year.
The Indian subcontinent had been the planet’s largest economy for most of the last two millennia.9 Three centuries of colonial rule ruined that legacy, as the East India Company suppressed and plundered southern Asia.
India now trades more goods and services as a proportion of GDP than its larger Asian neighbor, and far more than America. The value of that trade has rocketed from just seventeen percent of GDP when its economic reforms began 1991, to around sixty percent today.
For nearly a century prior to Independence, India was governed directly by the British under a system commonly known as the Raj, a term that takes its origin from the Sanskrit word rājya, meaning “kingdom” or “rule.”
The average citizen earns less than $2,000 a year. To be counted among its richest one percent required assets of just $32,892, according to research from investment bank Credit Suisse in 2016.19 But that same one percent now owns more than half of national wealth, one of the highest rates in the world. The International Monetary Fund suggests that India, alongside China, now ranks as Asia’s most unequal major economy. Thomas Piketty, the French economist famous for his work on global inequality, has shown the share of Indian national income taken by the top one percent of income earners to be
...more
The rise of the super-rich then ties into a second issue: crony capitalism, meaning collusion between political and business elites to capture valuable public resources for themselves.
Many politicians became astoundingly rich in this process, and would rightly have taken a place on the Forbes list had their holdings not been hidden in shell companies and foreign banks.
“They were careless people,” F. Scott Fitzgerald wrote of his characters in The Great Gatsby, his classic novel of post–Gilded Age excess. “They smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess.”
Speaking in 1916, Mohandas Gandhi warned that India faced a pernicious new kind of commercialism. “Western nations are groaning today under the heel of the monster god materialism,” he told students at a college in the heartland state of Uttar Pradesh. “Many of our countrymen say that we will gain American wealth, but avoid its methods. I venture to suggest that such an attempt, if it were made, is foredoomed to failure.”
The shift was profound. In 1947, Nehru inherited one of the world’s most globally integrated economies. Within two decades he and his daughter built one of the most rigidly closed.30 In retrospect these policies proved to be little more than a national catastrophe. India’s tryst with statism produced four decades of lackluster growth, watched over by an over-mighty state that to this day has only partially been dismantled.
In America, roughly a third of all motels are owned by families of Gujarati descent.12 Drawn outwards by commerce, “Gujjus” became India’s consummate globalists.
Political risk analyst Ian Bremmer defines emerging economies as those in which “politics matters at least as much as economic fundamentals for market outcomes.”
“Three factors—land, natural resources, and government contracts or licenses—are the predominant sources of the wealth of our billionaires,” he argued. “The numbers are alarming—too many people have gotten too rich based on their proximity to the government.” These ideas anticipated almost exactly the corruption scandals that washed over Singh’s government a few years later, in which assets like land and coal were found to have been doled out to favored businesses, creating losses of tens of billions of dollars from the public purse. So deep-rooted did these problems become that Rajan
...more
Digging into the data, Walton found a clear pattern. In the early years after its 1991 reforms India’s new billionaires operated mostly in areas like IT services, which had little in the way of rent-seeking. But as the economy took off and globalization jacked up demand for things like commodities and land, so the wealth of billionaires shot up most of all in rent-thick sectors, from mining and property to cement, infrastructure, and telecoms.
An IMF working paper from the same year showed that India had one of the highest and fastest-growing inequality rates in Asia.45 Its score on the Gini index—a measure of inequality where 0 means total equality and 100 total inequality—rose from 45 in 1990 to 51 in 2013. China’s increased even more quickly, from 33 to 53. But 51 is still unusually high: a level common in Latin America, but far above Asian economies like Japan and South Korea. The threshold for entry into the wealthiest “one percent” differed wildly across countries, according to research from Credit Suisse in 2016. In North
...more
On Modi’s watch the state built irrigation canals, laid highways, and fixed a bankrupt electricity system. He had a knack for drawing in investment from abroad, presiding over Chinese-style double-digit growth rates. Economists hailed his “Gujarat model” for combining export-focused manufacturing with efficient agriculture and modern services.
From the age of eight he returned home each day, threw down his satchel and headed out to attend the shakha (branch) meetings of the Rashtriya Swayamsevak Sangh (RSS)—the Hindu religious organization that in time gave birth to the BJP.
Although it does not field candidates, the RSS wields enormous political influence, not least because its members act as field organizers for the BJP. Many prominent BJP politicians, like Modi, have deep backgrounds in the movement. Yet few institutions evoke more distrust among Indian liberals, many of whom view the RSS, with its forceful religious views and paramilitary aesthetic supposedly modeled on the imperial British army, as protofascist in nature. As it developed, the RSS pushed a militant vision of Hinduism, which stood in implicit opposition to the secular multiculturalism of
...more
It was an idea that had its most tragic consequence when Nathuram Godse, a Hindutva ideologue and former RSS activist, assassinated Gandhi in 1948, shooting him in the chest on his way to an evening prayer meeting. Nehru outlawed the organization, claiming “these people had the blood of Mahatma Gandhi on their hands,” one of three occasions on which the group has been banned since Independence.12 But a year later it was allowed to re-form.
India’s black money problem dated back at least as far as the heights of Prime Minister Indira Gandhi’s tryst with socialism during the 1970s. For a time, wealthy Indians faced punitive top rates of tax as high as 97.75 percent, teaching the prosperous to hide their assets and entrepreneurs to disguise profits.13 “In theory, this should have ushered in a socialist paradise,” as economist Swaminathan Aiyar once put it. “In practice, it converted India into a massive black economy.”
These graft problems became so severe that “loot,” an old Hindi word for plunder, soon took its place in the English language, as historian William Dalrymple is fond of pointing out.
Although a hassle for the prosperous middle classes, gatekeepers were especially pernicious for the poor. Around half of Indians survived on less than Rs38 ($0.50) a day, according to one academic estimate, a group for whom even the smallest “harassment” bribe could be crippling.
In 1991, India attracted just $100 million in foreign direct investment. By 2017 that had ballooned to $60 billion.45 As capital flooded in, so a new class that were once described to me as bureaucratic “escort services” began to emerge, designed to help hapless foreigners navigate local rules and win the good graces of politicians. India is one of the world’s largest weapons importers, with fixers readily available to help seal lucrative arms deals.
Each year the World Bank’s “ease of doing business” survey gave a stark reminder of how badly the state was performing. In 2016, the year in which Modi introduced demonetization, India came in a dismal 130th out of 190 countries.52 Many problems were enshrined in legislation. The much-feared Factories Act of 1948, for instance, included rules setting out when a factory owner had to whitewash staircases or varnish window frames.53 Fifty-seven permits were needed to open an industrial plant, according to one estimate, or ninety for a hotel.
Even so, civil service jobs remained hugely prestigious and were available only through one of the world’s most competitive entry examinations, with some half a million applicants each year for about a thousand places.60 IAS officers were often intellectually formidable and viewed with great trepidation by business leaders, given the sweeping powers they wielded to change or enforce regulations.
Goa became an example of what economists call regulatory capture, as those meant to curb improper mining instead profited from its rise.
Political scientist Ashutosh Varshney suggests three “master narratives” have come to define India over the last century.2 First came secular nationalism, the ideology of Nehru and Gandhi, and still the official state creed. Second was Hindu nationalism, a reaction to the first, led by the BJP and the RSS. Finally came “caste-based social justice,” in which political parties representing lower caste groups began to win political power. Yet to these three, if you were only a little cynical, you might add a fourth: cash.
Broadly speaking, the millennium-old caste system divided Hindus into four groups, with the priestly Brahmins at the top and laboring Shudras at the bottom. There were then myriad other sub-castes, while below them all came the Dalits, once called “untouchables,” who stood outside the system altogether.
Yet in the aftermath of economic reopening, caste also became a more important political force in many parts of India. This was especially so when the government established a new set of official caste categories during the early 1990s—forward castes; other backward castes; scheduled castes; tribes—and began to use them as a basis for the distribution of scarce public sector jobs.
Beginning in 1947, India began to assemble a full parliamentary democracy. The early omens did not look promising. Modern academic models suggest that democracies rarely succeed in poor countries. In one study, the Polish-American political scientist Adam Przeworski found that countries below a certain level of GDP—$6,055 per head, to be precise—almost never manage to sustain democratic government.
Despite extensive evidence of voter bribery, the country’s elections tend to be both free and fair, with little evidence of ballot tampering. Armed with its “model code of conduct,” the Election Commission of India acts as a fierce policeman. Boisterous street campaigning is banned, while balloting is run remarkably cheaply. The real problem is exorbitant and rapidly rising election costs for political parties, which has pushed them to raise huge quantities of illicit funds, mostly from larger businesses. In turn, political leaders have built political machines whose wealth and power
...more
Their rule had delivered little for his town, but the local council was led by a Samajwadi politician elected a few years before, who had enjoyed a rapid transformation in her own fortunes. Victor simply called her begum, a word that means “powerful woman.”
The dramatic rise of so-called crorepati politicians—meaning those worth more than a crore, or ten million, rupees—provided one of the clearest signs of India’s recent political dash for cash. More than three-quarters of those elected to UP’s assembly on that Saturday in March crossed this threshold, meaning they had assets of roughly $150,000 or more. At the national level, the average MP was worth at least $2 million.
The need to raise money had another unfortunate side effect: the relentless rise of criminal politicians. Voters in most countries would shun candidates whose background came with hints of criminality. But in India, parties like the BJP and the Congress actively recruit such candidates. Roughly one-fifth of MPs elected in 2014 had “serious” criminal records, ranging from kidnapping and racketeering to murder, nearly double the rate ten years earlier.24 Rather than turn against them, voters often took violence and extortion as perverse signs of strength; a signal that a criminal politician
...more
BANANAS
During her first period in power in the early 1990s, her personal holdings rose from virtually nothing to around Rs530 million ($8 million), despite having a notional salary of just R1 a month.6 Subsequent court proceedings revealed lurid details of her wealth, including the findings of a police raid at one of her homes, which unearthed a collection of more than seven hundred pairs of shoes and ten thousand saris, along with substantial holdings of gold jewelry.
“In the south, you can say that politicians learned to steal, but to do it while expanding the cake at the same time,” as Devesh Kapur, a professor of political science at the University of Pennsylvania, once put it to me. “In north India they just went about taking as much of the cake for themselves as they could, and soon there wasn’t any cake left for anyone else.”
Sabharwal’s point was that modern north Indian politicians were more likely to show bandit-like traits, helping themselves to whatever loot they could find.
Traveling around India, I often found that different parts of the country took a perverse kind of pride in the ingenious and questionable practices of their own local business elite. Bankers in Mumbai held a sneaking appreciation for financial shenanigans, for instance, while in Uttar Pradesh the finesse with which politicians ripped off welfare projects was often deplored and quietly admired in equal measure. But it was Andhra Pradesh, with its sophisticated patronage-based politics and billionaire Andhrapreneur tycoons, that represented perhaps India’s most refined form of crony capitalism,
...more
“The difference between Bangalore and Hyderabad is that the guys in Bangalore who are making money are separate from the guys who run the city,” he told me. “In Hyderabad the businessmen and the politicians are intertwined. It is people who are from there, the entrepreneurs and their families, who have ties with people who are in politics.” It was this overlap, and the bonds of trust that came with it, that provided uniquely fertile grounds for corruption.
It also went the other way round, as politicians set themselves up in business and gifted contracts and favors to their own operations. Sometimes this happened openly. More often the process was clandestine, with a politician’s ultimate control disguised via benami chains of relatives or associates. Common in southern India, these arrangements soon spread to New Delhi, as politicians realized that corruption’s grandest profits were often to be made by owning businesses and then fiddling the rules to help them grow.
Kapur and coauthor Milan Vaishnav once tested this theory via an ingenious academic study. Construction magnates suddenly asked to take capital out of their businesses to refund their political allies would then be short of cash for other activities, they hypothesized, most notably starting new buildings.41 “Cement is an indispensable ingredient for construction,” Kapur told me. “So we looked for data to see if cement demand would fall around election time. And it did. In fact, the link shows up beautifully.”
But Gupta discovered that this equity component was often a mirage. The tycoons deployed a clever deception, telling Bank A they were putting equity into a particular project, when the money had in fact been raised as debt from Bank B, as part of the financing of an entirely different project, and then quietly transferred over. Both Banks A and B were kept in the dark, while the tycoons had to put in no money of their own.
At its most fundamental level “House of Debt” revealed that a crucial cog in India’s economy had broken. The conglomerates, the backbone of the industrial sector, found their biggest projects stuck. Hit with what economists call a debt overhang, they grew either unable or unwilling to invest again, plunging the wider infrastructure sector into recession.
In most countries, entrepreneurs who hit a rough patch were forced to plead with their bankers to keep their companies, and would therefore take whatever deal their lenders offered. But in India the deals worked the other way round. “The essential game was that if you were an industrialist, and you got into trouble, then you don’t have to pay back unless you want to,” Rajan told me. “And the only reason you want to pay up on one loan, is if you want to get more loans in return.”
The industrialists were exuberant about India’s future, showing an enthusiasm that soon infected supposedly risk-averse bankers too. Vijay Mallya’s Kingfisher was one obvious example. When things began to go wrong, the banks restructured the tycoon’s loans and gave him more time to fix his finances, while also swapping debt for equity at generous rates.22 When it became clear that Mallya was not going to be able to repay, they were stuck. They had no legal means to take control of Kingfisher, or even to force Mallya to repay what he could. The power imbalance between lender and debtor was too
...more
There were plenty of cultural and historical theories to explain the conglomerates’ successes, but mostly it came down to what Swedish economist Gunnar Myrdal once called India’s “soft state.”16 Western companies could raise capital through financial markets, and rely on the state to build good quality infrastructure. They also hired graduates from good universities and used the courts to settle disputes. In India, all of this was different: capital was expensive, infrastructure dilapidated, talent scarce, and the judicial system typically creaky and unreliable.17 Many businesses decided they
...more
Raising more money from within their own company also allowed India’s promoters to keep complete family control, rather than diluting their ownership by selling any more than a small quantity of shares to outside investors. At their worst, these kinds of enterprises were mockingly dubbed “lala” companies, using a Hindi word implying a business operation where the family owners were basically in sole charge, while signs of professional management and good governance were basically absent.
Caste often plays a similar role, especially in the north of the country, where major business families are mostly drawn from just a handful of castes and communities. Some are Brahmins like Vijay Mallya, a proud member of a sub-caste known as Goud Saraswat Brahmins, or GSBs. But more numerous are the Banias and Marwaris, the two trading groups which dominate the upper reaches of each year’s Forbes billionaire list, and which include among their number the Ambanis, Gautam Adani, and the Ruia brothers of Essar.
But even this seemed positively orthodox compared to the tens of thousands of luxurious blue boxes sent out in 2016 by mining tycoon Gali Janardhana Reddy, the most prominent of the Reddy brothers caught up in the iron ore scandals that hit the southern state of Karnataka. Reddy’s box opened to reveal a small television screen built into the lid. A video began in which the tycoon, alongside his daughter and her husband-to-be, performed a Bollywood-style song, set against a backdrop filled with CGI-generated bulls garlanded with flowers and dancing white horses.27
From time to time, India would play its neighbor and archrival, Pakistan, pushing the television audience as high as half a billion people.
