Raj Krishna, an eminent Indian economist who taught for many years at the Delhi School of Economics, is famous for having come up with the phrase “The Hindu Rate of Growth.” It was in the 1970s, during some of his lectures, that Krishna uttered this. It subsequently became one of the most cited phrases in development discourse in India.
The professor was lamenting the very modest rate at which the Indian economy had been growing since independence. He worried whether India was destined to remain forever trapped in this low growth scenario while much smaller countries such as Japan, South Korea and Taiwan were galloping ahead. He wondered if this was India's Karma, its Bhagya.
Others linked it to the fatalism and contentedness often associated with the Hindu religion. Writing in 2004, Dani Rodrik and Arvind Subramaniam referred to the Hindu rate of growth as “a term connoting a disappointing but not disastrous outcome and the acquiescence in the present that the religion supposedly imbues, because of its greater emphasis on the hereafter.”
By drawing attention to India's lackluster economic performance through such an evocative phrase, Krishna may have played a role in triggering some soul searching in India. This soul searching helped bring growth to the centre stage of Indian economic discourse. The policy stance changed in the 1980s, helping to unshackle India and launch its economy onto a higher growth path.
The beginning of change
The beginnings were made by Indira Gandhi. When she returned to power in 1980, the leader who had gone for sweeping nationalizations in the early 1970s opted for a more pro-business stance. The agenda was advanced by her son, Rajiv Gandhi, after he took over in 1984. There is a widespread belief that economic liberalization happened after 1991 under the Narasimha Rao government, with Finance Minister Manmohan Singh being the main architect. This view is only partially correct. Liberalization started in the 1980s.
The reforms of the 1980s favoured the incumbent businesses by removing many restrictions such as industrial licensing, and providing privileges, such as reduced taxes and easier access to imported capital inputs. The reforms did not do much to facilitate competition nor make it easier for newcomers to enter. The reforms were thus pro-business, in fact pro-incumbent business, and not necessarily pro-market. The economy was not opened for international trade; if anything, protection increased.
Nonetheless, India benefited from the fact that it had a critical mass of industrial enterprises where some skills had been acquired. These enterprises were thus poised to grow but their hands and feet had been tied by various restrictions. The unshackling of business enabled and incentivized these enterprises to not only grow but also raise productivity.
The expansion
The growth rate of the Indian economy doubled in the 1980s while industrial productivity rose even faster. This decade also saw the emergence of the IT sector as a major player. Rajiv Gandhi believed in the potential of information technology and during his regime, aided by the government in many ways, iconic companies such as Infosys and Wipro emerged and put India on the global IT map. This was a good example of the government facilitating the emergence and growth of private companies that eventually became behemoths. More such actions were to come later.
The pro-business stance continued in the 1990s but this time there was a fair amount of pro-market reforms that helped introduce greater competition in the economy. The Narasimha Rao-Manmohan Singh reforms from 1991 onwards led to external opening of the Indian economy, albeit cautiously. Trade barriers came down, although in a carefully calibrated manner. The same happened with opening the economy to foreign capital inflows. Even though it remained limited relative to the size of the Indian economy, FDI flows increased.
With growth moving to a higher trajectory, the phrase “Hindu rate of growth” slowly receded from the Indian psyche. But now something disturbing appeared on the horizon.
As growth took off and industrial production started expanding, businesses started hitting the infrastructure and energy bottleneck. There was a growing realization among Indian policy makers that such bottlenecks could be a big damper on future growth. Infrastructure and energy development emerged as an important agenda critical to sustaining the new growth trajectory.
But there was a big challenge. In the past, much of the investment in these sectors had happened in the public sector. But public sector resources were limited and there were other demands on the state coffers.
This is where Rakesh Mohan came in.
Rakesh Mohan was a World Bank economist who had left his cushy Washington job and returned to India just as the pro-growth and pro-business policy stance had started taking shape. He has since then served as Economic Affairs Secretary, Chief Economic Adviser to the Finance Minister, and Deputy Governor of the Reserve Bank of India.
In the mid-1990s, he was made head of a committee whose name said it all, the “Expert Committee on Commercialization of Infrastructure.” The government had realized that it had to go beyond the traditional public sector model. Steps had to be taken to commercialize the sector and bring in the private sector in a big way.
In its landmark report, popularly known as the “Rakesh Mohan Committee Report,” Mohan and his team of experts presented different options for public-private partnerships and recommended ways to implement such arrangements. Rakesh Mohan had a lasting impact. No wonder, he was subsequently asked to chair two other committees, one on railways in 2001 and another on transport in 2014.
The Gujarat connection
It is in this context that one should look at the growth of the Ambanis and the Adanis of India. It is no coincidence that many of these players are Gujaratis. When the Indian government took a policy decision to engage the private sector in a big way in infrastructure and energy development, much of the action happened at the state level.
The extensive licensing reforms of the 1980s and 1990s had taken away the prerogative of the federal government to decide the location of large businesses. Now the states had considerable freedom to take such decisions. While many states were slow to take advantage and some, such as West Bengal, faltered, a few moved ahead aggressively.
The leader of the pack was Gujarat. The state was pro-business even during the days of Nehruvian socialism. Now it went all out with such a stance. The private sector was to be given large contracts in areas such as power generation, port and airport development, road and railway construction, and setting up refineries. This was underpinned by a set of generous privileges such as subsidized land and credit, income tax concessions, and reduced import duties on machinery and other materials. Gujarat always had a tradition of politician-business alignments. This practice now deepened and started taking a different character.
A key element in all this was the financial sector, especially the state-owned financial institutions. Even when the private sector had deep pockets, it was reluctant to put its own money at stake in infrastructure projects with long gestation periods. Many businesses did not have the track record to raise money from the stock market. Massive amounts of bank debt became the norm.
Necessity for money
This was not necessarily a good model but the government, both at federal and state levels, was anxious to build infrastructure in a big way and decided to play along. The central government set up a dedicated institution, the India Infrastructure Finance Company, and also asked state-owned banks to lend liberally to private companies. Private banks also joined the game.
Later, foreign investors, enticed by the prospects of making big money in these sectors but unsure how they could navigate India's complex regulatory and approval systems, decided to invest in the ventures owned by the favoured Indian companies.
Even though on paper this was meant to be a competitive process, in many cases it degenerated into a scheme for the granting privileges to a few chosen firms. The boundary between politics and business became increasingly porous with politicians entering business, directly and/or through family members, and businesspeople entering politics. While in the 10th Lok Sabha, elected in 1991, the party in power, ie, the Congress, had only 14% of MPs with a business background, in the 18th Lok Sabha elected in 2014, 26% of the MPs belonging to the ruling BJP came from the world of business.
Such an environment facilitates privileged treatment. This game played out vividly in Gujarat. In 2008 when the plans of the Tata Group to set up a cheap car (Nano) plant in West Bengal fell through following riots over land acquisition, Gujarat moved at a cheetah-like speed to woo Tata. Chief Minister Modi sent a one-word SMS to Ratan Tata saying “Suswagatam” or “Hearty Welcome!” A deal was struck, apparently within 15 days!
The industrial giant had deep pockets. Nonetheless, it was provided with subsidized government land, heavily subsidized loans, free water supply, and a host of tax and other concessions. Tata was not the only one to benefit from such generosity. Larsen and Toubro, the Reliance Group and the Essar Group were all allocated huge tracts of land at heavily subsidized prices around the same time.
Enter Adani
Also benefiting was Gautam Adani, the man making global headlines today. In an article titled, “Business-Friendly Gujarat under Narendra Modi,” the French political scientist and long-time observer of India, Christophe Jaffrelot, cites the case of Adani Port and SEZ. When Adani built this complex in the early 2000s at a place called Mundra in the Kutch district of Gujarat, he benefited from a huge allocation of subsidized land, allegedly at prices about 1% of market value.
This was around the time Adani had started to develop cozy relations with the then Chief Minister of Gujarat, Narendra Modi. Over the past two decades, he is said to have received many such privileges from the government, whether at the state-level or federal, as have others such as the Ambanis.
Adani, and others like him, have benefited from the policy stance of a government machinery that sees itself as a developmental state presiding over a huge infrastructure and energy development program seen as key to growth. Previous governments, especially in the first three decades of independent India, had emphasized heavy industry development under public ownership accompanied by small and medium enterprise growth in the private sector. Now, the philosophy became “big is beautiful,” with an emphasis on mega-projects undertaken by large businesses.
This by itself is nothing wrong. Big businesses, exploiting the economies of scale and other advantages of size, can indeed make major positive contributions to an economy, as demonstrated by the Chaebols of South Korea. But that happens when you have a market-friendly policy stance where the power of market competition serves as a discipline on private business.
To some extent, it can happen within a business-friendly policy environment too. But, as the above story of India's policy transition shows, what starts as a business-friendly policy stance can quickly degenerate into a crony-friendly one.
The Indian government's approach of promoting “national champions” who are leading players in various sectors, such as the Adani and Ambani groups, through a wide array of policy and regulatory privileges has thus become a matter of concern to serious observers of the Indian economy.
Arvind Subramanian, who was Chief Economic Adviser to the Government of India from 2014 to 2018, and Josh Felman, International Monetary Fund's Resident Representative in India from 2006 to 2008, warned in the January-February 2022 issue of Foreign Affairs: “By backing the “2As” (ie, the Ambani and Adani groups) at the expense of other companies, both domestic and foreign, the government is encouraging an extraordinary concentration of economic power. There is a serious risk that India's national champions strategy could create an oligopolistic economy that will stifle innovation and growth.”
So, these are the deep roots of the Adani saga. As we try to make sense of the recent Hindenburg revelations on the Adani Group, we must understand the evolution of the policy stance in India over several decades -- how Indian policymakers moved from a mistrust of business during the 1950s-1970s, to a business-friendly policy stance from the 1980s, followed by some episodic attempts to transcend to a market-friendly stance in the 1990s, only to fall prey to crony-capitalism at the turn of the century.
Bangladeshis may be forgiven for sensing something familiar in all this.
Syed Akhtar Mahmood is an economist, previously with an international development agency.
