The problem

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ALL is not well in the Indian business community. The trust levels between the business community and the Indian state (executive, legislature, and judiciary) seems to have reached nadir and the economic slowdown is not the sole reason for this strained relationship. Despite the record investments in Jio Platforms and intermittently surging Sensex, a deep sense of anxiety among the Indian business community is palpable, although rarely expressed publicly. Even before the devastating effects of Covid-19, debates were raging regarding the structural versus cyclical nature of India’s economic slowdown, which has been apparent for 4-5 years at this point.

After reaching historic lows in private investment, and with high risk aversion apparent within the public sector banking system (and the banking system more broadly), state-business relations have continued to slide with no signs of recovery. Indian capitalists, particularly in the infrastructure space, bought into a joint vision of economic growth in India from the early 2000s onwards. This vision entailed an expectation from the state to provide enabling environments in input markets (good roads, reliable power, affordable land, timely licenses and permits, predictable factor markets, affordable credit, good regulation).And in return, the Indian state expected capital to invest consistently, play within the rules of the game, be conscious of not just shareholders but also stakeholders, and complete projects rather than running off when things became difficult.

Two decades later, it is clear that this compact has broken down; the state has been unable to provide many of these public goods, but the business class has also been found lacking with an inordinate amount of gaming, fraud and bad faith investments being discovered. The point is not to lay blame on either actor, but to examine the evolution of the relationship between these two groups. This issue of Seminar is an attempt to understand where and how the relationship soured and how it can be repaired. For India to prosper and grow, and to recover from the economic shock of COVID-19, the state and business must work together. But despite outward appearances, our conversations with members of the business community (promoters, financiers, and SME owners) in India conveys a deep sense of betrayal.

Some of this disenchantment comes from the changes in the rules of the game after the BJP came to power in 2014. Close relationships between politicians and businessmen has been a reality of Indian politics for a long time. The nature of close connections between the two groups in some ways was responsible for undermining the independence and legitimacy of both, and the rot became visible in the public eye during the UPA II rule. This context overpowered the lens with which the Narendra Modi-led government viewed the state-business relationship. The centralization of decision making even in matters related to the economy and the changes in the campaign (party) finance policies brought about by the Modi government further strained this relationship. Various policy decisions, especially those around electoral bonds, marginalized the role of small capitalists in this new regime. For the last thirty years, the business community has had relatively diffuse access to politicians and bureaucrats. Every industry had its allies and champions, and there were many paths to getting concerns heard. In this government, our conversations suggested, there is increasingly an impression that the channels of influence are narrow (concentrated in a few offices), and there are very few reliable intermediaries, as ministers and bureaucrats regularly fall in and out of favour.

The political class in the current dispensation, we observed, feels otherwise. In their wisdom, many of those who are making such complaints were patronized and had unlimited influence in the previous regime. These backroom deals, in their view, are the prime reason for the economic mess we are in. This government, our interviewers informed, is making an attempt to cleanse the unholy deals. The era of currying out of turn favours, we were told, is now over.

While much of the branding around Make in India, and Ease of Doing Business promises major changes in the business environment, it is becoming increasingly clear that a large section of private capital has not bought these promises yet. The stability of the future business environment in India, whether it will be a world based primarily on rules or deals, and whether it will be broadly beneficial or narrowly concentrated among a handful of firms are all open questions at the moment. There is a very real concern regarding increasing concentration of ownership across a range of industries.

Covid-19 has only exacerbated the dismal state of capital, as we see the fallout across industries as firm savings have dried up, new investment (except in select pockets) by domestic firms seems even less likely, and layoffs are widespread. At the same time, there seems to be a PR offensive by the government to attract foreign investors in areas like energy, manufacturing dislocating from China, roads and highways, and PSU sales. Where these effects are being felt the hardest are in the informal economy, which has already been reeling from the long shadow of demonetization, and the GST regime.

What are the anxieties of Indian capitalists? Do they want to invest in India in the short-medium term? Is the Indian state too harsh on businessmen, or have businessmen gamed the system one too many times, and are now receiving their comeuppance? Are enforcement agencies unfairly punitive? What are the consequences of the centralization of party finances? Are large foreign investors being privileged over domestic capital? Does state capitalism matter in India today? What measures can be taken to possibly repair some of this trust that has been eroded between businesses and the Indian state?

For India to prosper and grow, to continue its effort of bringing millions out of dismal poverty, and become an attractive investment location, the state and business must work together. But to do this, we must first answer some of the above questions and diagnose why relationships between businesses and the state have become so tangled, fraught, and tense over the last decade. The essays in this issue will take discrete portions of the state-capital relationships and try to shed some light on how India might move towards a more collaborative vision of economic growth.