The Indian Economy Blog

October 16, 2008

The ‘Indian Political Business Complex’

Filed under: Business,Miscellaneous,Politics,Regulatory reforms — Arjun Swarup @ 10:32 pm

An article of mine got published on TCS Daily on the evolving political and business landscape in India. The article can be found here. The article is reproduced below as well -

The decade and a half following India’s economic reforms of 1990-91 has been an exciting and transformational one for India and its people, and has also had a significant impact on the entire world. Much good has happened, with increasing growth and prosperity benefiting millions. The world has observed the rise of a large and vibrant middle-class, an aggressive and innovative private sector, and the growth of a soft culture. It is true that severe challenges still remain, caused mainly by massive disparities in income and access to resources, which mean that over 300 million people remain desperately poor, and large parts of the country not benefiting from growth.

A lot of India’s growth and stability today has been credited to its overall political structure and institutions. This is what has kept the nation united through the numerous challenges it has faced, and continues to face. The federal nature of the government, coupled with the presence of an independent judiciary and a powerful media have all combined to create the unique phenomenon that is Indian democracy. There are notable flaws, such as weak law enforcement, and an excessive bureaucracy, but, for better or for worse, Indian democracy has worked.

However, over the past few years, a major development has occurred in India, almost silently, which illustrates the uglier side of this system. While the growth rates clocked by the economy over the years have been impressive, most of the major policy changes benefited big established business houses. This has resulted in the India of today being a highly oligarchic economy, with a relatively small population enjoying disproportionate power, wealth and influence (four of the world’s ten wealthiest individuals are from India). Actual market friendly policies, which would help the middle-class and poor by boosting entrepreneurship would often be to the detriment of this group, and are often inhibited. In the 1950′s, Eisenhower warned the Americans of a “military-industrial” complex which could skew American priorities. His fears might have been unfounded, or at the very least, quite exaggerated. However, India today does the face the danger of a political ? big business complex distorting its priorities.

This phenomenon was partly displayed during the debate over the Indo-US nuclear deal. A seemingly innocuous bilateral treaty, it created frenzied debate, polarized the polity and the nation, and forced the government through a no-confidence motion. To a complete outsider, it all seemed a lot of action for something which appeared quite routine. To Indians though, it all seemed wearingly familiar.

The nuclear deal holds many ramifications for India, and the general consensus amongst the scientific, business and intellectual community is that it would be beneficial, if negotiated properly. Power generation is one area where the deal is said to have probable benefits. India remains critically deficient in power generation, with large parts of the country, including metros, suffering from severe power shortages. This has had a major impact on the growth of small business units, especially in manufacturing.

Since nuclear energy can be used to generate power, it appears that the deal could help meet the shortage, and thus, presents a huge opportunity for big business houses. Each major political alliance in India has its support base comprised of various business houses, and each alliance feels the pressure to make sure the deal goes through when it is in power, to ensure the maximum benefit for its support base. Simultaneously, policy changes such as decentralizing power production, removing subsidies or limiting power theft are often prevented, as those would enable the entry of other players into the sectors. It is like a double whammy effect.

Two other areas where the impact of the political-business nexus can be seen are agriculture and retail. Organized retail presents a massive opportunity for India to broad base its growth, and help kick start the agriculture sector, with estimates ranging from $ 500 billion to over $ 1 trillion. A large amount of agricultural produce in India is wasted each year due to the lack of cold storage, to the tune of $ 7 billion. Investments, both foreign and domestic, should be welcomed in this sector, as well as initiatives to promote local small businesses. Yet, the whole sector has been dominated by big players, who would rather establish consolidated supply chain which would squeeze prices all along the retail chain.

On a broader governance level, the negative impact of the political business nexus can be observed. Running for public office in India is an incredibly expensive proposition and campaign financing remains murky, with virtually no accountability. This works perfectly to the advantage of the business lobbies, in exercising control over political parties. The labor market also remains highly informal and unorganized, as this keeps labor prices cheap. Another good example is the real estate sector, where acquisition of land for commercial or private purposes remains incredibly difficult, for businesses which want to establish themselves. It needs to be pointed out that these phenomena were not the creation of the big players today, but it works to their benefit today to ensure that the status quo remains.

It is entirely likely that the influence of this group would diminish with the passage of time, and that fears about it would prove unfounded (as some of Eisenhower’s were, in the case of the US). Yet, in the Indian context, there needs to be a greater awareness of the dangers posed by such developments, and how they could impact the overall growth story.

18 Comments »

  1. Your article talks disparagingly about the connects between politics and business without a clear, proven rationale.

    Your central tenet that leads you to despair about the connects between industry and politics that exist today is your fear that India has become an oligarchy.

    However, it is unfair to call India is an oligarchy – one could refer to Russia, South Korea, the Middle East or even Singapore in those terms but given the rate at which India has produced new business barons in businesses ranging from IT to telecom to wind power generation and banking belies the term’s applicability to the Indian economy.

    Comment by Kiran — October 18, 2008 @ 12:13 pm

  2. YES. INDIAN GOVERNMENT POLICIES BENEFIT INDIA’S BIG BUSINESS HOUSES

    While I do not have quantitative data to support your point, it does seem that policies in India seem to favor India’s big business houses. India needs to do more to reduce poverty. According to an International Herald Tribune article World Bank data shows that in 2005 42% of India’s population lived below the poverty line ($ 1.25 per day). ( http://www.iht.com/articles/reuters/2008/08/26/america/OUKWD-UK-WORLDBANK-POVERTY.php ).

    Eliminating barriers to entry for foreign companies is absolutely necessary. There is way too much protectionism in India. Competition is good for everybody.

    Comment by Shankar Saikia — October 18, 2008 @ 11:50 pm

  3. hi prashant,

    could you let me know the theme you are using for this blog? is it a free wordpress theme?

    thanks in advance
    Srikanth

    Comment by Srikanth Eswaran — October 24, 2008 @ 12:14 pm

  4. Srikanth

    Yup, we use wordpress

    Comment by admin — October 25, 2008 @ 7:48 pm

  5. Agreed that the big business houses find a good platform to continue their domination and the going is tough for the small enterpreneurs, still we can’t ignore the various rags to riches stories that exist in India. The humble beginning of ‘Infosys’ is a perfect example.

    Broadly speaking, the economic upliftment always comes from the top. Poverty will only be alleviated gradually. When the money is generated, it takes time to trickle down to the grass roots. It is not the other way around. The power generation would have to benefit the big business houses in order to make it sustain. It is going to be slow and steady and I have no doubt that we are on the right track. The concerns raised are valid but there is nothing to worry as the market forces are dependent on the consumer middle class ( which was a lower class till two decades ago). As the economy grows, the middle class will expand thus eroding the lower classes and eventually the poverty.

    Comment by Vipin Thakur — October 27, 2008 @ 8:41 am

  6. As I think indian economy is in slow down. It will take some in recover.

    Comment by Rakesh Singh — October 29, 2008 @ 2:29 pm

  7. hey arjun, you said it very correct that our economy is an oligarchic one where only the elite people are enjoying the benefits and these benefits are not reaching the rest of the population..

    Comment by ipsg007 — October 31, 2008 @ 3:56 pm

  8. I believe that the situation has existed since independence and not a recent trend. I can recall major industrial houses controlling cement, textiles, steel markets to name a few, from the earliest of times and party bosses (mainly the Congress) having close relations with these oligarchs. And the courts were not unaware of the nexus either. An independent press (& media) was non-existent.
    The recent rise of more oligarchs is balanced by the greater independence of the judiciary and the increased influence of a free press (& media). A feature not witnessed in the US political scene is the presence of a strong left wing to balance the powers. More correctly there is broader spectrum of political forces than in the US.
    There is hope yet.

    Comment by Ksheer — November 1, 2008 @ 11:00 pm

  9. Hi!your article raises the critical issues like the oligarchy nature of Indian economy and nexus between politics and big business houses .It is a matter of concern that it leads to concentration of power and wealth in few hands .The gap between the rich and poor has widened .the condition of common people still remains the same even after 60yrs of Independence .

    Comment by Anakshi — November 2, 2008 @ 12:48 am

  10. Arjun: Good and thought-provoking piece…

    You said, “On a broader governance level, the negative impact of the political business nexus can be observed. Running for public office in India is an incredibly expensive proposition and campaign financing remains murky, with virtually no accountability…

    This is probably at the root of most of what is wrong with India – i.e. bad policies, ineffective governance.

    Instead of a rant here though, I would urge you and your readers to have a look at this post which attempts to dissect the problem…

    The “solution” is of course, far more complex but still all is not lost…

    http://satyameva-jayate.org/2008/11/06/changing-india-step-1/

    Comment by B Shantanu — November 6, 2008 @ 10:32 pm

  11. Sorry, the link to the post that analyses the problem is this:

    http://satyameva-jayate.org/2007/09/14/fixing-the-system/

    Comment by B Shantanu — November 6, 2008 @ 10:33 pm

  12. Great post. Another example i can give you is that of telecom. In progressive countries, a telecom license is divorced from spectrum auctions, so that telecom services that do not require spectrum, such as VoIP or a simple calling card can be rendered cheaply. In India, spectrum has been insidiously “bundled” with the licence, so as to make it almost impossible for small scale entrepreneurship to deliver telecom services. While speaking incessantly of customer benefit, the TRAI has done all in its power to limit the small scale competition that can keep telecom sector margins in check.

    Comment by bunty — November 15, 2008 @ 2:55 pm

  13. With the terrorist mayhem in South Mumbai, one of the “oligarchs” corner of India, I can only hope you are correct and that the much needed security infrastructure will be finally influenced – perhaps incessant media chatter driving aam junta sentiment will also add to it.

    However, I disagree with your approach to the “oligarch” analysis. India has gone from having massive industries controlled entirely by the state (old Russia) to individuals/corporationss – it seems to me the forces are pointing towards further liberalization. You must pick a side – do you want capitalism driven by brutal market forces or a socialist state, USA or France? It seems you want a dot com boom in india where entrepreneurs can play a role without a balance sheet. I would suggest thats on its way, consumer spending needs to rise for people’s needs to rise upwards on Maslow’s pyramid.

    The nature of some of these business (cement, retail, telecoms, infrastructure) is that not everyone can play – you need a massive balance sheet. And economies of scale force further out the small players, not any direct govt policies. And with respect to the mobile-Telecom sector, India has one of the most vibrant markets, with consumers (aam aadmi) benefiting!..

    So alright, I am all over the place… but you started it!..

    Comment by amit — December 6, 2008 @ 12:10 am

  14. Hi

    This is nice article reagrding political and business landscape in India. I think it is helpful to know more about politics and business.

    Comment by Uravashi — December 31, 2008 @ 4:17 pm

  15. [...] blog . A piece written by Arjun Swarup in the Indian Economy blog in October, titled  - ‘The Indian Political Business Complex‘ is worth rereading – he discusses the same issue:    While the growth rates clocked by the [...]

    Pingback by Imagining India » Blog Archive » Easy outs and hard decisions — January 8, 2009 @ 11:55 am

  16. I think your suspicions are not unfounded. Two examples I can think of are the SEZ fiasco in Goa, with the Central Government seemingly reluctant to side with a popularly elected state government and siding with the developers. A much more serious issue is the EIA legislation. One article is here, but it is very sinister and I will do a more detailed blog post on this soon.

    Comment by Vikram — January 16, 2009 @ 3:48 am

  17. Hi Guys!

    We need to look at the situation from the normative economics view and not the emotional view.

    The prosperity of large business houses has little co-relation with the eradication of poverty. The business houses exist in its own ecology and the only meaningful ways in which they are connected to the base of the pyramid is in that they have the ability to generate employment and pay taxes.

    In both ways, they have serious limitations. The employment generated can never be large enough to employ the largest workforce in the world. Nor can the taxes be used to eradicated poverty. Indian government has to sustain the competitiveness of these businesses and a lot of the resources are gone towards this end. The base of the pyramid has to help itself.

    We need to look around the world and in the field of development economics to understand that the co-existence of poverty and prosperity side by side is a norm rather than an exception for a country with large population base like India. We need to find ingenious ways to address the socio-economic issues and help people help themselves. There is no other way that has worked in the past and I see no other way that will work in the future.

    Nitin

    Comment by Nitin — January 29, 2009 @ 8:11 pm

  18. [...] blog . A piece written by Arjun Swarup in the Indian Economy blog in October, titled  - ‘The Indian Political Business Complex‘ is worth rereading – he discusses the same issue:    While the growth rates clocked by the [...]

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