The January 2023 Hindenburg investigation report accused the Adani Group – one of India’s largest conglomerates – of share price irregularities.
The Adani Group is primarily an infrastructure and energy company with assets acquired through privatization and received significant funding of public sector banks. Market value had risen dramatically since 2019, until the report caused stock prices to plummet.
This episode has catapulted “crony capitalism” to the center of a strident political debate in India. Opposition parties have demanded a parliamentary inquiry, which Prime Minister Modi’s government is unwilling to initiate.
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The Supreme Court has appointed a committee of experts to advise on possible errors by the Securities and Exchange Board of India, the main financial market regulator. While it has found no clear violation of the regulations, it seems unlikely that the controversy will die down any time soon.
But this is not the first controversy over business-government relations in the era of market liberalization. In 2011, the government of former Prime Minister Manmohan Singh was accused of corruption and biased allocation of coal blocks and telecom spectrum to private companies.
These episodes were politicized and led to the Supreme Court revoking mining permits. These incidents recur because of two structural features — weak regulatory and policy-making institutions and socio-political trends caused by economic liberalization, in particular rising inequality and costly elections.
Indian market reforms replaced state-led planning with deregulated markets. Industrial decontrol stimulated the dynamism of private enterprise. But the reforms have failed to create effective economic governance institutions for the policy-making and regulation necessary for efficient markets.
Several “independent” regulatory bodies were established in the infrastructure and natural resources sectors to support private sector participation in areas controlled by government monopolies. Such an new settings must evolve, improve and be accepted by stakeholders.
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Prime Minister Narendra Modi has largely coddled the capitalist class. Photo: Global Courant Files/AFP/Noah Selam
But their evolution has been hampered by the lack of a strategic roadmap. Territorial wars took place between government departments, new institutions and private stakeholders. The new institutions lacked independence, clout, expertise and financial resources. Political figures remained influential in regulatory decisions.
Also, the allocation of valuable natural resources to private enterprise continued to be a source of rent-seeking controversies. In the case of coal licences, politicians opposed the introduction of a transparent auction system. It is easy to see how crony capitalism can arise under such circumstances.
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Effective economic governance institutions in democracies require autonomy from political pressure. A politically weak government can clash, while the commitment of a strong government ensures a fair and correct procedure.
Many regulatory settings have matured over time but some remain weak. India’s independent judiciary played a key role in shaping the structure of successful regulators. Court rulings on legal disputes have also contributed significantly to the definition of roles and the establishment of appeal bodies.
Economic reforms promised a liberal market economy in the 1990s. But even after three decades, there are not many preconditions for this goal in India, including minimal state ownership, prompt legal enforcement of formal contracts, and the government’s equal distance from competing private business interests.
The corporate sector is vibrant, but dominated by five major corporate houses. Industrial concentration has increased, with the share of assets and revenue of the “top 5” private companies rising since 2015.
The top 5 initially expanded their reach across a wide range of industries and then increased their presence in these industries aided by mergers and acquisitions. They have at the expense of grown of the next largest companies.
Their dominance evokes comparisons with South Korea’s chaebols (“national champions”) that emerged during former South Korean president Park Chung Hee’s heavy and chemical industrialization drive.
Unlike India, there were two main disciplining mechanisms that drove the chaebols to deliver efficiently. The South Korean chaebols functioned within a clearly formulated national industrial strategic plan.
The support they received from the government depended on their commitments being fulfilled. They also faced fierce international competition in product markets.
Unlike South Korea, India needs foreign investment to bolster its industrial competence and hopes to be an alternative investment destination to China. Still, the dominance of the top 5 discourages the entry of foreign companies, who are concerned about whether the the playing field is level and about policy consistency over time.
Traders hold banners during a demonstration demanding the closure of online shopping platforms Amazon and Flipkart in New Delhi on January 15, 2020. Photo: AFP/Sajjad Hussain
The Indian Planning Commission was abolished in 2014 and replaced by think tank NITI Aayog. For all its shortcomings, India’s style of policy making has historically been broadly advisory. But as of 2023, there are no effective participatory mechanisms to define and communicate long-term strategic policy objectives.
Public acceptance of policy is important for implementing policy in a diverse, disparate federal democracy. In 2021, India witnessed prolonged dissent and political protests from farmers over proposed agricultural market reforms.
In the context of industrial policy revival around the world, India needs to review its policies policy-making institutions. Here India can learn from South Korea’s example to combine industrial policy with global integration.
The East Asian policy stylethe consensus-building and visioning processes provide valuable lessons
Chiranjib Sen is a former visiting professor at the School of Development, Azim Premji University.
This article was originally published by East Asia Forum and has been republished under a Creative Commons license.