Taking the temperature of capital


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THE singular defining moment in recent memory around the question of state-capital relations was the exchange between Rahul Bajaj and Amit Shah at an industry conclave in Mumbai in December 2019. Not only was the content of this exchange explosive and controversial, but the participants (Rahul Bajaj and Amit Shah) were also symbolic of larger tensions that have emerged between India’s business elite and the Indian state more broadly.

On one hand there was Rahul Bajaj, patriarch of the Bajaj Group and former Member of Parliament, from one of India’s most established business families and with a political history deeply intertwined with the Congress party. His grandfather, Jamnalal Bajaj, was intimately involved with the freedom struggle, and was a close associate of Mahatma Gandhi. His name had been given to him by Jawaharlal Nehru. He has been a leading member of India’s business elite and a public participant in all of India’s major economic debates over the last four decades. As one of India’s most visible two-wheeler and three-wheeler brands, with interests in many other sectors as well, the Bajaj Group had been a clear and consistent beneficiary from India’s economic growth since Independence.


On the other hand, there was Amit Shah, Home Minister of India, the political savant and master negotiator of the ruling Bhartiya Janata Party (BJP). Amit Shah’s inseparable and concurrent rise in national politics with Prime Minister Narendra Modi, through controversy, churn, and eventual victory from 2014 onwards, is the stuff of legend in contemporary politics. Shah had established himself as a bit of a renaissance man within the BJP; able manager of elections, financially creative with a good knowledge of banks, cooperatives and maintaining relationships with small and medium business, and one of the key architects of the BJP’s gradual domination of Gujarati politics in the 1990s and 2000s and Narendra Modi’s rise in national politics from 2010 onwards.

Not only were Bajaj and Shah from polar opposite parts of the political spectrum, they also had fundamentally different views about the role of businesses and politics in public life. Bajaj, primarily a businessman, viewed politics as an enabler of good business, whereas Shah viewed business and their activities as enablers of winning politics. This was a key schism between them as they faced off at the conclave that day.

When Rahul Bajaj addressed the stage (where Amit Shah, Nirmala Sitharaman and Piyush Goyal were seated), he mentioned many things, but what stood out specifically was his open admission that there was an atmosphere of fear among industrialists (‘ham darte hain’), that the business community was not sure that any of their public or private critiques were being taken in the right spirit (other than denial), and that the broader environment was deteriorating. Bajaj did this standing next to RBI Governor Shaktikanta Das and industrialist Adi Godrej. At this same conclave, Mukesh Ambani and other major industrialists were sitting in the audience throughout the day. Some even applauded Bajaj during his extended five minute address.

Amit Shah’s response was cool and collected. He addressed a number of Bajaj’s points, but most notably stated, unequivocally, after a long pause, that there was no reason for anyone to be afraid (kissi ko darne ki koi zaroorat nahi hai). He admitted that the atmosphere needed to be improved, but also contested Bajaj’s narrative and went on the defensive by listing the consistent critique that the BJP had experienced through the press and in Parliament. He ended by saying that there was no opposition or critique that this government was afraid of, and that critiques would be taken on their merits to improve this government.


The content of this exchange lies at the heart of the deterioration of state-capital relations today. While framing this issue of Seminar, it was unclear where the consensus view of Indian capital lay and what was signal and what was noise. So we set out to try to take the temperature of capital, and figure out what the business class really thinks about the current state of the economy, their interactions with the bureaucratic and political class, and what it might take to improve the business environment. Over the course of the last 4-5 months, I conducted 63 interviews with large promoters, CFOs, bankers, SME owners, partners at large law firms and consultancies, start-up founders, venture capitalists, economic journalists and even a few politicians. Not surprisingly, most of them only agreed to an open conversation on condition of anonymity. The following narrative is collated from these interviews.


It has been clear for some time that the private sector is very pessimistic about the future of the Indian economy. The single best measure of this is new investments, and investment levels have declined every year continuously from FY 2014-2015 to FY 2019-2020 well before any pandemic hit. While there are many reasons for this trend, what was cited over and over again in my interviews was the two large negative shocks to businesses in the form of demonetization and GST, coupled with the increasing risk aversion in lending among banks.

There are perhaps two categories of businesses to consider in this situation; those sitting on large amounts of cash, and those who have just enough money to continue covering their operating costs. The number of businesses, particularly SMEs, who have transitioned from the first category to the second in the last half-decade has gone up significantly, and many company promoters admitted to their unwillingness to invest, simply because they have not done good business for a while. For the small group of companies who have managed to remain in the first category, there still remains considerable uncertainty of what the rules of the game are under this government.

Maintaining a stable external environment so one can continue to do business has always been the primary concern of any commercial entity, either public or private. Business elites and large businesses in India usually manage their environments through relationships and lobbying. Triumphalism about Ease of Doing Business notwithstanding, India has been a difficult place to do business for a long time, especially in areas where the Indian state looms large. Since the early 1990s, things have become easier in certain sectors where the state had less historical control (eg. IT, FMCG, pharmaceuticals), but small businesses have consistently been an afterthought in government policy-making, and areas where the state’s role is larger (eg. infrastructure, energy, defence) are almost impossible to navigate without consistent management of political and administrative relationships.


So why is it so difficult to do business in India today? According to the businesspeople we interviewed, one of the single biggest problems which exists right now is the uncertainty of intermediation. If relationship management has been the backbone of getting things done in the business world, then unstable intermediation makes it difficult for businesses to have any certainty about the future. Will my product be banned tomorrow? Will I have access to Internet where I am doing business? Will I get my license or permit in a timely fashion? Will the public sector bank lend money for my business? How much tax will I be expected to pay next year? How much cash should I hold on to in case of emergency?

These are just a sample of the many concerns that were expressed during my interviews. Businesspeople, both small and large, expressed a deep dissatisfaction with the predictability of regulation, taxation and implementation of what used to be fairly straightforward processes during earlier regimes (even in Modi’s Gujarat). This, combined with a shrinking ability to have their concerns taken seriously by top administrators and politicians has meant that many businesses have preferred to wait and watch, rather than rushing into new investments in this renewed environment of uncertainty.

To be fair, the first Modi government came to power riding high on the support of the private sector. Most large industrialists across the country were hopeful that the new government in 2014 would reduce red tapism, implement the ‘minimum government, maximum governance’ philosophy, and ease excessive state control over various parts of the economy. This new government was supposed to be pro-market, pro-private sector and expected to bring all the perceived benefits of the Gujarat economic model to all of India.

But unfortunately, after the first year of the first Modi government, the infamous ‘suit-boot ki sarkaar’ moment occurred, when in the Lok Sabha Rahul Gandhi openly accused the Modi government of rubbing shoulders with businessmen and forgetting the common man. This critique rung true and stung hard. And its aftermath morphed into an extended exercise in social distancing and image management, where even being seen with corporate leaders was prohibited by top politicians for almost a year.


The problem was that the reaction to the suit-boot ki sarkaar moment dispossessed India’s administrative machinery of some of its key avenues of interacting with industry and resolving problems: attending conferences, private convenings, meeting in chambers, and other usual forms of state-capital socialization. Not only were politicians explicitly prohibited from public appearances with businesspeople, but this signal went down the chain, and Secretaries and Joint Secretaries started doing this as well.

The IAS officers who were the lifeblood of the economic bureaucracy suddenly found themselves having to conduct their interactions with business either over the phone, or through safer intermediaries. Some of them just stopped talking to businesspeople altogether, worried about the professional consequences of breaking the Lakshman Rekha. The situation got bad enough that certain, braver, more empowered IAS officers (primarily in the PMO) had to start putting out feelers to the business community, bypassing economic line ministries which were paralyzed by fear and risk aversion.


This paralysis slowly diminished over the next few years, but the damage had been done. A new bureaucratic normal had been created, where the mere appearance of being close with the business community was frowned upon. While select ministers (Arun Jaitley, Piyush Goyal, Nirmala Sitharaman, Nitin Gadkari) did start interacting more and more with the private sector, it was easier for most career-preserving bureaucrats to leave all the decision making and socialization to their political masters, rather than take any initiative themselves. Add to this the high-profile prosecution of H.C. Gupta, the former Coal Secretary, and it was very clear that the safest action was no action.

Sabyasachi Kar and co-authors have argued that in most developing countries, formal rules based systems are less likely than deals based systems between firms and bureaucratic and political elites.1 This means that the letter and rule of law is less important than the structured deals with those in power, which at least creates some amount of short-term certainty about the business environment. These deals are periodically renegotiated as elections overturn political leaders or bureaucrats are transferred, but generally speaking, there is some continuity which allows business to continue relatively unimpeded after renegotiation.

However, what seems to have emerged post suit-boot moment, is a concentration of decision making power in two major offices, and then a kind of political and intellectual hot potato which jumps between a few different offices: the PMO, the Ministry of Finance, Niti Aayog, the Finance Commission, certain well established PR agencies, the Minister which is in favour that week, RBI and a few influential economic and financial intermediaries. For the last five years, none of these entities can be said to have consistent influence, but every week or month a few of them are in favour and a few of them are not. In such an environment, a credible intermediary can turn ineffective overnight (by omission or by commission is unclear), and hence no deals are stable. Even large political financiers in 2014 have sometimes found it difficult to get their voices heard.


Almost all of my interviewees agreed that the election of Modi’s BJP government in 2014 and its subsequent agenda of reform (economic and otherwise) has fundamentally changed the nature of the existing deals with capital, but not always in a positive way. During the first term in 2014, there was a certain agenda driven by metaphors of temple purification, which was going to come in and clean out the dirt that had piled up in the Indian economic system. Through formalization and digitization of the economy (through moves like demonetization and GST), the movement of money would be more visible and transparent, through efforts like the Indian Bankruptcy Code (IBC), under-performing foot-dragging capitalists who had been surviving on relationships and manipulating the banking system would be purged from the system, and through the mass courting of foreign capital, the next great wave of Indian economic growth would be ushered in.

Unfortunately, the contents did not quite match the packaging. Because of the populist turn after the suit-boot accusations, the economic reforms agenda remained half-finished as the government’s attention turned towards more redistributive programmes (Ujjwala, DBT, Jan Dhan etc.). The biggest complaint we heard from business was a bewilderment at the incoherence of this government’s economic philosophy. Despite the clarion call of minimum government, there have been no major disinvestments of PSUs in the last six years.

The policy paralysis of the bureaucracy during UPA-II seemed to now have moved to the public sector banks, and as multiple RBI governor memoirs have made clear, the attempts to shine light and sterilize public sector banks’ balance sheets through policy measures like Prompt Corrective Action were often stymied by combined lobbies of public sector bank managers and indebted industrialists. Despite the overtures of cleaning the temple, policies like those around electoral bonds opened up brand new forms of cronyism. As one leading consultant put it, ‘while this government may want to privatize and dismantle certain public sector companies, what it will replace them with will be even more statist.’ An experienced promoter put it even more starkly, ‘we always hated MRTP (Monopolies and Restrictive Trade Practices Act), and I’m seeing echoes of that same philosophy returning.’


It is easy to blame the current government for many of the reasons behind India’s economic slowdown. They pulled the trigger and took many decisions which have resulted in muted growth, growing unemployment, and a tangled web of problems in India’s financial system. However, India’s capitalists have played a major role in creating this problem as well.

As Pratap Mehta put it in a recent podcast, ‘Indian capital itself has been a relatively unenlightened group. With their back against a wall, with 3% growth, it is still not thinking as a class for itself. You wish they would… A lot of reforms didn’t happen in India because incumbent capital did not want it.’2 In fact, during my conversations with various consultants and SME owners, they reiterated this frustration that India’s largest capitalists simply do not seem to be interested in articulating their ambivalence about India’s current economic trajectory (as Rahul Bajaj did) because they are certain that they will be able to weather the storm and dominate the environment that awaits them on the other side.


After 20-25 years of increasing domestic competition since 1991, India has seen its largest rises in industrial concentration across a group of industries in the last six years. Some of this has been the natural outcome of the bankruptcy and consolidation following the broader economic slowdown. But some of it has been by design, as some of the other essays in this volume will elaborate. Between the inability of Indian public sector banks to lend to MSMEs, and the increased bankruptcy of various MSMEs post-Covid, the top 50 companies in the Sensex, and the top 20-30 business groups in India are likely to see a massive jump in their valuations and business as they consolidate on their existing advantages of capital and relationships.

Despite the decade-old warning by Credit Suisse’s Ashish Gupta about India’s ‘House of Debt’, concentrated lending to India’s largest business groups will likely increase in the coming years, since they are the only ones considered credit-worthy.

Despite all the messaging surrounding Startup India, starting a company in India today and having it survive is an unforgiving, frustrating process. It is, of course, easier than it was 20-30 years ago, but venture capitalists and start-up founders are full of tales of woe and vitriol regarding the archaic taxation laws that they still face, the difficulties with registration, and the complete inability of convincing the Indian banking system to lend them any money.


The reality of start-ups in India today is that most of them survive despite the government, not because of it. Many of the more promising companies and start-ups are preferring to register in Singapore, with a subsidiary in India, to avoid red tape and unexpected changes in taxation. Much of venture capital in India comes from abroad as large domestic financial institutions still have not evolved the willingness or skill to value promising early stage businesses. Not a good look for a country which claims to make its name on software and IT based innovation.

Part of the problem with capital as a class is that its traditional institutions of collective action, the chambers of commerce, have become completely captured by the largest firms. And in the process, their representations, asks and demands of the Indian state have become myopic and unrepresentative of industries as a whole. As a consequence, much of the real anxiety of capital is communicated through private back channels by influential editors of publications, PR agencies, and various other forms of intermediaries, who are similarly flummoxed by the inconsistency of various sites of lobbying.


To give one example, this government’s flip-flop on electric vehicles policy has been a continuous source of consternation for the auto industry, where Niti Aayog first announced ambitious (and frankly unrealistic) targets for fleet electrification, alarming the industry at large. Then the Minister of Road Transport and Highways (Nitin Gadkari), publicly distanced himself from these targets, undermining the public relations campaign for EVs that Niti Aayog had been touting. Auto companies during these few weeks experienced some major heart attacks, as the government’s demands of their investment trajectories for the next decade varied wildly.

As we see industries like telecom and airports being dominated by companies in favour, it is hard to infer anything else but a complete disregard for competition. To be fair, as one financier put it to me, ‘if telecom is going to be dominated by one company, I would rather it be Indian than foreign.’ There is a larger unresolved question here of market power. Even if industries do get concentrated, will the incumbents exercise market power to milk customers and extract unreasonable rents from a captive market? Academic economists get quite worked up over such issues, but among the Mumbai crowd, many feel that with an interminable ability to borrow, some of these firms may be able to avoid hurting consumers disproportionately through price gouging. It seems like an idealistic view, but not entirely uncommon.

Regardless of how concentrated capital becomes, one major turn which we are seeing is a move towards a more coercive form of capitalism, where capital acts largely as a subcontractor of the Indian state, rather than a genuine partner in the growth process. Particularly in the infrastructure space, but even in other areas, the state as procurer, regulator and lender gives the Indian state many avenues of influence on large firms, which means that in the co-dependent relationship, private capital almost always ends up being submissive. The dream of the public-private partnership economy dreamed up by people like Vijay Kelkar and Rakesh Mohan seems to have unfortunately become dormant for now.


If there is, in fact, so much wrong in state-capital relations, then why is so much foreign capital flowing into India? Is the entire painting so far too dark and apocalyptic? When I asked this question during my interviews, I received a range of different answers. The portfolio managers were all optimistic, stating that India’s comparative growth story was still quite strong in the developing world, and that the money, both in the form of FII and FDI would start to flow in quite considerably, especially post-Covid when investors are starting to look for more opportunities outside of China.

But some of the financiers had a valid counterpoint to this, which was that we are currently living in unprecedented times when global financial markets are awash in excess capital. Many investors with long time horizons are desperate to deploy capital, even if they can only secure 4-5% returns, because they need to push the money out to balance their national accounts and gain at least some return (given the rock-bottom bond yields in countries like the US, or sometimes negative yields in places like Germany). In such circumstances, India’s baseline growth, its growing young population, its growing electricity, housing, and consumer demand, and its sheer scale are by themselves enough to warrant a gamble.


The unfortunate catch in this situation is that since such capital is often quite risk-averse, most of the money will go to the largest business groups, the ones who can be expected to manage the unexpected twists and turns of India’s political system. In the last few years, in aggregate, only large-cap stocks have consistently gained in Indian equity markets. Collectively, md-cap and small-cap stocks have either flat-lined or lost value. Much of this has been reinforced by public sector banks’ lending practices, which have become increasingly risk averse as the scrutiny of their lending portfolio increased after the rising NPA problems led to RBI’s policy interventions.

And while a certain corner of desperate foreign capital is piling on in India, most elites in Mumbai have been cognizant of gradual capital flight over the last half-decade as an entire generation of businesspeople (primarily ranked in the 50-500 range by market cap) have been sending their children and money abroad (to Singapore, Dubai, London, US) as they see shrinking possibilities for future business in India, and would prefer their engagement with India to be in the form of investment capital and hot money, rather than the headache of owning and running a business on one’s own.

There is an emerging perception that this government is moving away from dealing with domestic capital (outside of the 10-20 largest groups), and is treating foreign capital preferentially. Given the amount of foreign private equity investment, investment into Reliance since the onset of Covid-19, the preferential abilities for large firms to borrow abroad, courting of sovereign wealth funds and SOEs like Saudi Aramco, Rosneft and Gazprom that have passed, it is hard to dispute this sentiment. This might be a reflection of the BJP’s frustration of dealing with many small domestic capitalists, and having an easy exit option in the form of desperate international capital. Or it might be part of a larger pathology of control, where compliance and discretionary allocation of capital are preferred to chaotic, unpredictable market mechanisms.


Many of my interviewees, after initial hesitation, were bursting with shades of anger, disappointment, and betrayal. While some Indian capitalists were definitely crooked, took advantage of the system, and consistently manipulated it to their benefit, colouring the entire class with this brush is unfair and reductive. And yet this is the majority sentiment among Indian capitalists today; that the discourse has moved back to the 1970s where the dastardly capitalist is manipulating the system and the saviour needs to come in and fix it.

Whether the saviour wins the day or not, the clear place to start fixing this problem is the banking system. Pushing more money to deserving MSMEs, preventing excessive lending to the same business groups, being more strict regarding defaults and calling in pledges for shares, reducing liberal evergreening practices and minimizing phone-banking and politicization of public sector bank lending practices would be a good place to fix the capital allocation problem. But this will not fix the deeper problem of erosion of trust, which may well take another decade to recover. For that trust to return, good economics will have to be just as important as good politics. But right now, unfortunately, that appears to be a distant reality.



1. S. Kar, L. Pritchett, S. Roy and K. Sen, Doing Business in a Deals World: The Doubly False Premise of Rules Reform. ESID Working Paper No. 123. The University of Manchester, Manchester, 2019.

2. ‘The Seen and the Unseen’ with Amit Varma, podcast. Episode 186: ‘What Have We Done With Our Independence?’ Interview with Pratap Bhanu Mehta, 15 August 2020, online.