Rather than just its quantity, Sinha also wanted to find out how all this new money was being made. The son of Yashwant Sinha, a veteran BJP leader and former Indian finance minister, he grew up well acquainted with politics. At Harvard, he studied under management guru Michael Porter, writing papers examining how Indian businesses used political connections to bend the rules of the License Raj. Now he became convinced that something similar was going on once again, as the super-rich reaped excessive profits in ways that reminded him of earlier eras in the United States. Long before he coauthored his 2011 Financial Times article on crony capitalism—the one that began my own thinking on the subject of inequality and corruption—Sinha wrote an essay in the weekly Indian magazine Outlook comparing explicitly the “Barons of America’s Gilded Age” and the new Indian elite they resembled.17 “Too many businesses were accumulating wealth because of their ability to manage the government rather than manage innovation,” he told me. “I felt angry. The economy was being manipulated for very few people. This was a collusive system.”
Political risk analyst Ian Bremmer defines emerging economies as those in which “politics matters at least as much as economic fundamentals for market outcomes.”18 Businesses in developing nations often struggle to operate in the face of laws and regulations that are neither transparent nor well enforced. Instead they learn to rely on connections and patronage to expand. Before liberalization India was unusually susceptible to these problems, with its convoluted “crony socialism” regime of rules and licenses. Free-market intellectuals hoped this system would wither once these controls were torn down. For a while, heightened competition did indeed push older business houses into relative decline. In their place, initially at least, there rose a new generation of entrepreneurs who seemed better able to grasp the opportunities of India’s global era.19
Technology outsourcing was one celebrated example, as blue-chip companies in countries like America and Britain began to hire inexpensive software experts in distant Indian cities to fix their IT systems. The story of software group Infosys became the stuff of particular corporate legend, as a group of middle-class engineers, supposedly with just a few hundred dollars in start-up capital, managed to build a world-beating company based in Bangalore, the southern city that became India’s technology hub. Founded in the early 1980s, Infosys came of age after liberalization. Alongside a handful of other big IT businesses, it helped to craft a new image of India as a land of pioneering start-ups and vast call centers. Narayana Murthy and Nandan Nilekani, the company’s best-known cofounders, were admired as models of social mobility and ethical practice, as well as being among India’s first tech billionaires. It was a throwaway phrase by Nilekani—“Tom, the playing field is being levelled”—that inspired American journalist Thomas Friedman to write The World Is Flat, his breathless 2005 opus hailing a new era of global capitalism.20 Infosys’s successes encouraged a new generation too. “To be successful in commerce here, when I was growing up, you really had to be born into an industrial family,” Meera Sanyal, the former India head of Royal Bank of Scotland, once told me. But billionaires like Infosys’s Murthy “represented a middle-class aspiration to win in business, but do it in a clean way. He became like a beacon of hope.”21
Yet it was not long before such hopes began to ebb in the face of darker trends brewing elsewhere in the economy. At the time, India was still lauded abroad: a 2006 editorial in Foreign Affairs described it as “a roaring capitalist success story.”22 But back at home this roaring growth created ideal conditions for corruption. “Until roughly the year 2000 becoming a billionaire was something that everybody saw as a good thing in India. They saw it as a coming of age,” I was once told by Rajeev Chandrasekhar, a tech entrepreneur turned parliamentarian (and a Lamborghini-driving billionaire himself).23 The generation who rose in the 1990s mostly amassed their new fortunes in businesses like IT, pharmaceuticals and automotive manufacturing. Those that followed more often operated in sectors with closer ties to the state. “In the last decade, almost all of the billionaires created in India have been created because of the proximity to politics,” Chandrasekhar said. “They have been created in specific areas where government policy determines whether you make a billion or you don’t.”
Not long after finishing his Excel sheet, Sinha sent it to Raghuram Rajan, the future governor of India’s central bank. The two men had been undergraduates together at the Indian Institute of Technology, the country’s most prestigious engineering college, and had stayed friends in the years since. At the time, Rajan was still teaching economics in Chicago, although he had also just taken a job as an informal adviser to the then prime minister, Manmohan Singh. He was struck by Sinha’s research and mentioned it in a speech he gave in Mumbai later in 2008. In that speech, Rajan posed a simple question: “Is there a threat of oligarchy in India?”24
Citing Sinha’s data, Rajan argued that there was. Public resources were being gifted to industrialists in increasingly vast quantities, he argued, allowing them to rake in outsized and undeserved profits. “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 eventually coined a new term to describe them: the “Resource Raj,” rather than the License Raj, meaning a Russian-style system in which politicians, bureaucrats and industrialists colluded to carve up access to valuable natural resources and shared the proceeds among themselves.25
Around the time those scandals were emerging, Michael Walton, an academic at Harvard, decided to tease out more precisely the link between cronyism and the super-rich. British by birth and a political scientist by training, Walton moved to New Delhi in 2007, where his wife worked for the World Bank. Both lived in Mexico beforehand, a country known for the momentous wealth of its plutocrats and the cronyism of its political leaders, many of whom made fortunes during the privatization of formerly state-owned industries in areas like telecoms and banking. Walton fretted that India was now falling into the same trap. “I got interested in the striking fact that India had such high levels of billionaire wealth,” he told me. “The worry that India was going to turn out like Mexico seemed clear.”
Having seen Sinha’s spreadsheet and read Rajan’s speech, Walton began digging into the Forbes data himself. In the mid-1990s, India’s billionaires owned assets equivalent to just one percent of GDP, he found. A decade later that had soared to ten percent.26 Walton wanted to know what explained this huge increase. To find out, he split the billionaires list into two. The first included companies in sectors that were mostly untouched by government, in which business success was assumed to come mostly from efficiency and innovation. The second featured businesses in what Walton called “rent-thick” sectors, meaning those where firms made money—or “rents”—via access to favors. Economists worry about what they call “rent seeking,” meaning the way some businesses earn profits beyond what they could make in a competitive market, for instance by owning the rights to land or resources or intellectual property. Some companies earned rents by lobbying or bribing, others from operating in cartels or as monopolies. The term “rentier” was sometimes used by left-wing thinkers to describe the same thing, meaning those who grabbed valuable resources, such as licenses to drill oil fields or develop real estate. 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 commoditie
s 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.
Over the years since, the various billionaires’ fortunes had ebbed and flowed. Sometimes Walton’s data showed them rising to astonishing levels, as in the stock market boom of 2008, when net billionaire wealth ballooned to a stunning twenty-two percent of GDP. At other times they dipped back, as when India’s economy hit a rough patch in 2013 and 2014, a period when many industrialists in rent-thick sectors faced particular struggles. But overall billionaire wealth stayed high and stable, holding steady at roughly a tenth of GDP between 2010 and 2016—one of the highest levels of any large economy.27 “For a very poor country, India is a clear outlier for the wealth owned by billionaires relative to its economy, and one that isn’t far behind Russia,” he told me. “And it’s this, more than anything, I think, that has led to all of these comparisons between India today, and the nineteenth-century robber barons of America’s Gilded Age.”
Dividing India’s billionaires in two was a crude but illuminating exercise. Ruchir Sharma, an author and investor at investment bank Morgan Stanley, did much the same thing when he drew a distinction between what he called “good and bad billionaires,” meaning those who made money through innovation and those who relied on graft and favoritism.28 In real life these distinctions were often blurry. Men like Mukesh Ambani, Vijay Mallya, and Gautam Adani were controversial, but all three were also self-evidently talented managers and deal makers. By contrast, even India’s supposedly honest IT tycoons sometimes faced awkward questions about just how they had acquired the land for their software campuses, or whether their governance standards were as good as they at first appeared. In 2009, for instance, India suffered one of its worst-ever corporate scandals when the software group Satyam Computer went bust in a $1 billion accounting scam that drew comparisons with the collapse of Enron, the disgraced American energy group.
That said, the Bollygarchs tended to be easy to spot. They operated mostly in rent-thick industrial sectors, running tightly controlled family-owned businesses. Their affairs were almost always organized as sprawling conglomerates, rather than narrowly focused enterprises with the kind of distributed shareholding structures common in Western companies. A handful made money in ways that echoed the oligarchs of Russia, snapping up state-owned assets using capital provided by state-owned banks. But most merely operated in sectors that were tied closely to the government, where they could put their connections to good use. There was even a special local word for the tycoons themselves: “promoters,” a term that referred to the individual or family who owned most of the equity in the business and who in turn tightly controlled its operations.
The business of rent-seeking in India led many tycoons to build up sophisticated influence machines. Some, like Vijay Mallya, became politicians themselves. Others created modern versions of the old Reliance Industries “intelligence agency” in New Delhi, the sophisticated lobbying operation built up over the decades by Mukesh Ambani’s father. There were more indirect techniques of influence too, as prominent tycoons expanded their business operations to open hospitals, schools, hotels, and newspapers. “The reason is simple,” as Sharma put it. “Most people understand it is wrong to take cash bribes, but few in India see much of a problem in accepting gifts in kind, even one as valuable as free medical treatment for a family member, free schooling for a child, free hotel banquet facilities for a niece’s wedding, or favorable coverage for one’s business or political ambitions in the local rag.”29
The picture painted by Sinha and Walton’s research was at once exciting and troubling. It showed a new kind of capitalism being built in India after 1991, and especially in the aftermath of booming growth and global reintegration of the 2000s. This was far from entirely dominated by cronyism. Large chunks of India’s economy remained in the informal sector, where most Indians still worked as farmers or smallholders. Other areas were dominated by globally competitive firms, in sectors from e-commerce and IT to media and financial services. Then there were the “public sector undertakings,” the state-backed giants which still accounted for perhaps a fifth of national output. But there was clearly a sizable portion of the Indian economy in rent-thick sectors operating “a unique Indian business model,” as one academic study put it, “in which cultivating political connections in Delhi became the core competence and the most important survival imperative for businesses.”30
Sinha, who later went on to win election as a member of parliament for the BJP and serve as a junior minister under Narendra Modi, blamed many of India’s difficulties at that time on the ruling left-wing Congress party and its weakness for corruption. But at a deeper level, he also pointed to a three-way split at the heart of Indian business. First, there was state capitalism, meaning those many companies that were still run by the government in areas like steel and mining. Second was liberal capitalism, meaning those sectors that tended to be most connected to the global economy, and which were also the most competitive and least corrupt. Finally, and most troublingly, there was crony capitalism: the sectors dominated by the Bollygarchs, most of whom enjoyed deep connections with the state. A fierce battle was under way between them, Sinha said, and one whose outcome would define the kind of country India would become.
An Unequal Fortune
The rise of India’s billionaires mirrored changes that had swept through the world economy over recent decades, bringing with them new anxieties about inequality. Data compiled by Thomas Piketty showed the share of national wealth held by the richest Americans hitting levels not seen since the 1930s.31 A similar story was true in many advanced European economies. Yet while hedge fund magnates and Silicon Valley entrepreneurs came to represent the excesses of Western capitalism, it was in countries like India, with its newly powerful Bollygarch class, that the super-rich were expanding quickest of all.
In the mid-2000s, developing countries accounted for around a fifth of the world’s 587 dollar billionaires. A decade later that figure had jumped to more than two fifths, while the overall total of billionaires had shot up to 1,645.32 China made up the largest part of this increase, but India, with its hundred or more billionaires, made a sizable contribution. India was unusual too for the proportion of national wealth held by its super-rich and the speed at which its fortunes were growing. In 2016, research from Credit Suisse showed that India had 178,000 dollar millionaires, just a fraction of America’s total and only a tenth as many as China.33 But over the coming decades the investment bank predicted the millionaire population would expand more quickly in India than in any other country bar China.34
At one level India’s billionaire fortunes tracked the overall economy, meaning the wealthiest prospered when India itself was doing well. This was especially true when the stock market rose, inflating the shareholdings of India’s “promoter” tycoons. Some saw this as an example of “trickle-down” economics—the flip side of an economic package that lifted hundreds of millions of people from poverty in the decades since 1991. A more sophisticated case for optimism, however, came via Caroline Freund, an American economist and former executive at the World Bank. Against those who saw billionaire wealth as a symbol of social dislocation, Freund claimed it was better understood as part of a natural process of economic advancement.
“All countries that have developed rapidly over the past 200 years have experienced some version of this process of ‘tycoonomics,’ ” she wrote in her 2016 book Rich People Poor Countries.35 The amount of money being earned by industrialists like Mukesh Ambani or Gautam Adani might look extraordinary at first. But much the same thing happened in America and Germany during the second half of the nineteenth century, an early era of globalization in which many entrepreneurs prospered by building up “mega-firms” closely tied to world markets. Then, as now, their owners were amply rewarded for the risks they took: “The smartest, pushiest, and lucki
est of the founders of this group of firms become the super-rich.”36
Freund’s argument drew in turn on the changing way economists understand trade. Textbooks tend to describe this as a process between nations: country X makes butter; country Y makes wine; the two exchange for mutual benefit. But more recent research has focused instead on ties between firms, given that more than half of all globally traded goods and services flow through a relatively small number of huge multinational corporations.37 Most of the goods arriving at Adani’s Mundra Port, for instance, would have been sent in and out by large global companies, like car maker Maruti Suzuki, or indeed Adani’s businesses themselves.
This insight sounds unremarkable at first, but it had radical implications. In markets like India, foreign multinationals did not just dominate trade. They also provided overwhelmingly the most important source of foreign direct investment. Rather than viewing innovative start-ups and fast-growing small businesses as the most important sources of economic growth, this kind of thinking suggested that it was big corporations, and the international supply chains flowing within them, that acted as the true engines of globalization. Domestically, Indian companies that earned income abroad grew more rapidly than those with purely domestic operations. They created more jobs, too, and tended to be more productive. Often their activities helped to restructure the sectors in which they operated—as, for instance, Mukesh Ambani’s Reliance did in petrochemicals—forcing local companies to up their game and making entire industries more efficient. Because of this, Freund argued, it was predictable that owners of such companies would make giant fortunes. This fact should be welcomed as an indication of successful economic change.
This more relaxed attitude about the rise of the super-wealthy in turn echoed a wider intellectual tussle between two of India’s greatest living intellectuals, the economists Jagdish Bhagwati and Amartya Sen, which in its own way came to define the contours of the country’s debates about its own economic progress.
The Billionaire Raj Page 10