HARISH DAMODARAN - INDIA’S NEW CAPITALISTS: Caste, Business, and Industry in a Modern Nation

Indias New Capitalists

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THE INDIAN CENTURY

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Ramachandra Guha and
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David Hardiman
Gandhi in His Time and Ours
Christophe Jaffrelot
Dr Ambedkar and Untouchability

Indias
New Capitalists

CASTE, BUSINESS, AND INDUSTRY IN AMODERN NATION

HARISH DAMODARAN

With a Foreword by
NANDAN NILEKANI

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Copyright 2008 HARISH DAMODARAN

eISBN 978 81 7824 426 6

e-edition:First Published 2013

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To My Parents

Foreword

P ost-independence India has had a complicated and often tense relationship with its entrepreneurs. only in the last two and a half decades has India's business community begun to recover from an image whiplashed, tarred and feathered by the whimsy of politicians. At the time of Independence the Indian government sought to throw the baby out with the bathwater: the forces of imperialism and capitalism were seen as inextricably linked, and entrepreneurship dismissed as a dangerous disease which worked to the detriment of the common people. The young nation sought its economic roots in socialism, whereby the state would hold the commanding heights of the economy and business was relegated to a relatively minor role.

For India in the 1950s this new system was an important part in the casting off of colonial chains, a spirited response, in Nehru's words, to the 'cut-throat civilization of the West'. With its promise of addressing inequality, the state-regulated economy of socialism also seemed particularly suited to India, a country made up of starving masses substantially under the thumb of zamindars and princes. The necessity of providing a dominant role for a state that promised benevolence and paternal government was consequently in the nature of a national belief. It was a belief shared by India's businessmen, as evident from the Bombay Plan which was formulated as early as 1944.

But in the decades that followedbleak in both economic growth and poverty alleviationthe notion that governments can achieve economic goals better than businesses turned out to be more myth, less truth. And, despite India's focus on creating a casteless society, the Indian state had scarcely understood the role that business can play in enabling and nurturing such a society. There is an old Roman saying to the effect that private capital 'has no smell'; in a free market, successful investment is untainted by ideology, caste, and even family loyalties, and is a strong driver of secular growth.

Despite this inherent liberating potential of business, the mixed economy pursued by Nehru lurched even further leftwards in the 1960s, and then in the same direction with Indira Gandhi and her various populist policies. The excessive policy controls that were put in place over this period rapidly led to the misdirection of entrepreneurship. The capitalist's access to political power and the goodwill of ministers for the cornering of licenses required to conduct business became far more important than organizational efficiency and customer satisfaction. Indian business had to wait until the 1980s to see the emergence of pro-business policies by the state. The financial crisis of 1991 led to the emergence of pro-competition annual budgets and policies, and the first decade of the twenty-first century saw Indian business becoming truly global.

During the travails of these decades, India's business communities, even when suppressed and undervalued, played an important role in preserving and nurturing the country's entrepreneurial traditions. In this sense, Harish Damodaran's book is a very important contribution to understanding the development of entrepreneurs in independent India, and I am particularly pleased that it has emerged from a New India Foundation Fellowship.

As Damodaran has shown so well, business in India has grown today to being no longer limited to a few castes or families. While business was an occupational silo in the caste system, over the years more and more caste groups got into business, moving away from their traditional occupations. This trend became more prevalent with the liberalization of the economy after 1991, which opened the floodgates for new entrepreneurs; and with the rise of the knowledge-based economy, which brought in a whole new breed of businessmen from a variety of backgrounds and mindsets.

In an immature market economy, being part of a business family or a business community remained a key source of competitive advantage. It provided access to capital, and it caused trusted family members to be seen as a source of management talent as well as of market and technical knowledge within an industry. This is evident, for example, among the Gounders of Tirupur in the knitwear business, and in the Palanpur Jains who run the diamond business. In addition, if buyers and sellers were from the same community, it created an environment of trust which lowered transaction costs and time.

This dynamic of family-run businesses was turned on its head by the 1991 reforms. These, apart from generally creating an environment that supported business and competition, also led to the creation of a more mature market infrastructure. The abolition of wealth tax on productive assets in the 1991 budget removed the incentive to hide assets and led to the rapid growth of wealth in stocks. The remarkable modernization of the Indian stock markets through the rise of the National Stock Exchange and the National Stock Depository Limited (NSDL), which created the platform for paperless trading, led to a single efficient national market for both raisers of capital as well as investors. The arrival of Foreign Institutional Investors (FIIs) in the early 1990s led to a new source of capital for companies to raise money. The demand of the new investors for greater transparency, along with the efforts of the stock exchange regulator SEBI and the voluntary actions of leading companies, led to a rapid improvement in corporate governance standards. In the meantime, as banks took to computerization and automation, the individual retail investor got easy access to stock markets through online retail trading applications.

In this environment, kinship and family ties became greatly reduced factors as the keys to a market. The need for informal family-and community-based capital were reduced with the rise of various forms of early financing such as angel funding, venture capital, and private equity. The culture of a father figure who managed and directed business practices has in fact now been replaced with a wide pool of professional managerial talent emerging out of India's management institutions, and these MBAs have been exposed to the global management practices of MNCs and international business houses.