Indian Business Culture: Profitability through Transfer of Public Resources

Over the past two years, this blog has been critical of the Indian business culture. At times, our views were construed as being against the very principle on which the markets survive. But the events of the past few weeks have proved and reinforced the arguments that have elucidated over the past few years. If markets are to survive and prosper they need to function properly in a manner that they gain the confidence and trust of all the stakeholders not just the shareholders. If they are to survive without shocks, it is imperative that they benefit the a predominant part of the population rather than a few. Unfortunately, the model of economic growth that India has encouraged actively creates oligopolies and rent-seeking. Government policies in various sphere encourage such rent seeking behaviour. Add to this, the model based on a valuation metric (capital appreciation) that has been stressed in the capital markets to build 'wealth' and we have a recipe for disaster. It is imperative to note that our recipe for disaster should not be construed as a collapse of the markets (or a revolution). On the contrary, increased dysfunctionality of the markets have the potential to cause large scale dislocation and social crisis in a country like India. The sheer size of the country is sufficient reason why we should be wary of such dysfunctionality in our economic life. 

The below image is a newspaper clipping from The Times of India, Hyderabad Edition, 18 August 2012 (p.10) about two such cases of looting of private resources. 

The nature of siphoning off public resources is such that the profitability of a vast majority of the listed companies, though not all, is dependent on government doles of different kinds. Little wonder that foreign investors prefer companies that have the potential to build oligopolies or rent-seeking businesses. We would argue that if the government subsidies of various kinds (sales tax, excise benefits, etc) were removed a large number of listed companies would either run into losses or would make nominal profits with margins of less than 3%. Add to this form of direct and indirect doles by the government induced bank lending, either those due to pressure from the government or due to extra-economic considerations and we have a classic case of companies that will invariably end up winding up. 

Historically, one of the problem that we have faced in India is that companies, governments, investors and borrowers believe that debt is no different from profits and hence the proclivity to borrow beyond our means. Glibert Slater words in 1929 seem prophetic: 'India has a scarcity of people willing to practice the unattractive virtues of thrift and forethought’(In to L.C.Jain, Indigenous Banking In India, Macmillan, London, 1929, p. xiii).

And, we complain of fiscal deficit, subsidies and lack of interest among investors in long-term investing!!!