Does India 'deserve' so many billionaires?

Aug 12, 2014

In this issue:
» Do the govt.'s inflation policies make sense?
» Is industrial production set to improve?
» This PSU is looking to invest in Iran
» Whay haven't crude prices spiked?
» ...and more!

Last week we had discussed RBI governor Dr Rajan's concerns with respect to how emerging markets are vulnerable to big shifts in capital flows. Indeed, Dr Rajan opined that with investors exiting the market at the same time, global markets were at the risk of a crash.

But that is not the only point that worries the RBI governor. The other issue against which he spoke very strongly was crony capitalism. And this is something that has spawned so many billionaires in India. What is the connection between the two? Allow us to explain.

An article in the Economic Times had highlighted how India ranked sixth in the top 10 countries for billionaires as of 2013 with 60 billionaires. This number is expected to increase to 119 with a 98% growth by 2023, according to a Knight Frank Wealth Report.

But this is not necessarily something to be proud about. Besides the fact that it raises the spectre of rising income inequality in the country, the other point to be raised is the factors that are contributing to the rise in the number of billionaires.

And the government has quite a lot to do with this. According to Dr Rajan, the rich and the influential are alleged to have received land, natural resources and government contracts or licenses in return for payoffs to corrupt politicians. In other words, most of the wealth that billionaires have today comes from the government.

Thus, while India today can boast of being one of the world's biggest democracies and one of the fastest growing economies, majority of India's population especially the poor are not reaping much of the benefits of the same. Rajan further states, "One of the greatest dangers to the growth of developing countries is the middle income trap, where crony capitalism creates oligarchies that slow down growth."

Is there any solution to this? The RBI governor believes that direct cash transfer is one such answer. Rather than offering the poor public services, he opines that it makes more sense to directly give cash to the poor so that they can decide on how to best spend it. Reducing the number of public services offered would also free them from corrupt middlemen and politicians. This would also entail overhauling the entire subsidy structure given that it never reaches the intended beneficiary anyway.

According to us, Dr Rajan has indeed raised some very valid points. But will the Modi government do anything about it given that the interests of so many politicians and influential rich people are involved? Well, if it doesn't, the rise in population coupled with income inequalities could give rise to social unrest. And when that happens, the core fundamentals of Indian economy will get paralyzed. Crony capitalism in support of handful of billionaires cannot support sustainable growth of the economy. And we completely agree with Rajan that billionaires who have earned their riches by cornering key sources cannot be a measure of Indian economic success.

Do you think that crony capitalism is the biggest problem that India faces today? Let us know in the Equitymaster Club or share your comments below.

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The Indian government in recent months has made some seemingly contradictory moves. On one side, it doubled the minimum export price of onions. This, to make it tougher for farmers to sell onions outside India. While this may seem to be a strong indicator of the government's intentions to curb rising food prices, another recent move by the government brings in a seemingly more curious angle to the whole affair. That is, just a week later, it doubled tariffs on imported sugar which will have the obvious effect of a rise in the price of domestic sugar. While this may have been done to encourage the country's farmers to grow sugarcane, one thing is certain. Policy making for achieving a desired end in the Indian context is not as simplistic as one would like it to be. Perhaps one of the reasons why definite policies always take arduously long to take shape in our country.

 Chart of the day
2014 began on a poor note for the Indian economy at least as far as industrial production goes. Infact, the data for the first three months of the calendar year showed that production actually contracted. The months of April and May 2014, however, present a stark contrast to this. Growth has actually rebounded. So should we expect this trend to continue in the coming months as well? One of the key reasons why industrial growth has been so sluggish over the past many months is the considerable apathy shown by the erstwhile UPA government towards development. As a result of which key projects got stalled and growth began to just taper down. Expectations are high of the Modi government giving the much needed boost. If that indeed turns out to be the case, there is no reason why industrial production should not continue to grow in the quarters ahead.

Is industrial production set to get better?

When a public sector company talks about investing abroad due to infrastructure constraints in domestic markets, one can only imagine how bad the situation could be. The company we are referring to is Nalco, the aluminium giant. The country it is looking to venture into is Iran. The total project size stands at a massive US$ 3 bn. The constraint the company is facing is availability of cheap input costs - mainly coal and power. As per the company's Chairman, it is facing massive energy challenge in India, which is why it is looking abroad to secure its energy needs. Not to mention how this move is expected to improve the cost efficiencies given that it resorts to meeting its coal requirements by using imported coal back in the home land. While the new government has vowed of bringing about positive changes, this develop only goes to highlight why there is a need to shake things up at home. And that to at the earliest!

If you ask most oil experts, they will be almost unanimous in their view that based on fundamentals alone; crude oil prices don't deserve the high prices they usually command. Apparently, the premium that they always carry is attributed to geopolitical risk. Given that majority of the world's crude comes from the potentially volatile region of Middle East, crude oil always has this huge risk priced in. And with war drum beats getting louder by the day in Iraq, there's a very strong case for the risk premium to go even higher. However, this does not seem to be happening currently. Oil prices haven't quite spiked the way they used to whenever there was some conflict in the Middle East.

So, what explains the divergence from this trend? While there are quite a few factors responsible for this, the biggest cushion for oil prices is in the form of an increase in oil production in the US. This is not all. A big boom in oil production in the US can alter the crude price equation in a much bigger way going forward. Now this will be music to the ears of big oil importing nations like India we believe.

Never before in the history of mankind have central banks assumed the kind of importance and influence as they wield now. In the aftermath of the US financial crisis, the US Fed has intervened extensively through its magnanimous QE program and by suppressing interest rates at near-zero levels. This has not only distorted the free market forces of the US economy but has also had far-reaching consequences across the global financial system. Has the Fed's ultra-easy monetary policy really worked? Well, the Fed will never openly admit it. But all indicators point to the fact that it has been utterly unsuccessful in bringing the US economy back in shape. Yes, the US policy makers have managed to kick the can some distance away. But they have entered an arena from where the return path is not at all easy.

We came across an article in wherein the US Fed Vice Chairman Stanley Fischer has voiced his concerns about the economy. As per him, the labour force participation has been weak. Even the housing recovery has not been assuring. And that these problems could, in fact, be long term in nature. This means that winding down the QE program and the near-zero interest rate regime will not at all be easy. We fear that the eventual crisis because of the Fed's reckless monetary experiments will prove to be catastrophic for the future generations of America.

The Indian stock markets continued to trade higher in the afternoon trading session. At the time of writing, the BSE-Sensex was trading up by 166 points (+0.7%). Barring IT and FMCG, all the sectoral indices were trading in the green. Consumer durable and auto stocks were witnessing maximum buying interest. Most of the Asian share markets were trading firm led by Indonesia and Hong Kong. However, China is trading in the red. European markets have opened the day on a negative note.

 Today's investing mantra
"People who are good at math naturally look for math to explain investment decisions when often the competitive advantage is not revealed by mathematics." - Charlie Munger

Editor's note: Apologies for the delay in mailing yesterday's issue of The 5 Minute WrapUp due to some system errors. In case you have missed it please click here.

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15 Responses to "Does India 'deserve' so many billionaires?"


Aug 18, 2014

At last we have a man with a spine and courage to utter such facts loudly. In many private talks I used to voice my concerns about this impending social unrest. People used to ridicule me. If it happens, it may take another 200 years to come back to normalcy. Just look around and see what is happening in those countries where there is civil war or unrest for any reason. I don't know what are we leaving behind for the next generation??



Aug 13, 2014

Thanks for highlighting the ill-effects of crony capitalism


Archie Sequeira

Aug 13, 2014

The RBI governor has certainly made a very valid point. What is surprising really is that our politicians and policy planners have been disregarding the income-disparity which has been widening over the years with nary a concern for the poor. Though the general standard of living has been improving, the bottom layer which in our country means millions of people has hardly been touched.
Let us be wary of outcome of this unfortunate situation and do something quickly. Cash transfer is a good idea though not a remedy. Social unrest is sure to arise if we continue to ignore this large and suffering population.

Like (1)


Aug 13, 2014


Like (1)

Ashok Kumar Sethi

Aug 12, 2014

I applaud the comments made openly by Dr Raghu Ram Rajan, Governor, RBI in regard to capitalisation of Govt. resources and deriving maximum benefits in order to become the Indian Billionaires with the nexus of politicians. During the period of UPA, when he was brought back from World platform to Indian platform and was assigned the task to head RBI, there was speculation that this personality is politically motivated and may not sustain after Modi coming to power. But today, He is standing lying a Giant and helping the Nation to path of self achievement in the field of Financial recovery. He looks to be state forward personality and speaks the truth. He has rightly said that when there is no equal distribution of national output to the people and this disparity makes few to be the richest because in communism, this episode may not come true and can only prosper in democracy set-up as the present days politicians help few capitalists to become millionaires and then to billionaires and even to trillionaires. When this disparity will end? As a student of economics during the period of post-graduation, I used to talk about Mixed economy and then came Socio economy but today what I see is Politio economy. Old good days may not come, so how to talk about Acchhe Din of Modi.

Like (1)

K Sankaranarayana Pillai

Aug 12, 2014

I agree with Dr. Rajan cent per cent. Crony capitalism is even against genuine capitalism. Narendra Modi encouraged crony capitalism in Gujarat and it is evident in the case of Adanis. In the name of development we encourage this. Yes. We get roads and bridges. And infra structure facilities. But this phenomenon contaminates our economy. The nexus between politicians and these crony capitalists is a serious problem on which the RBI governor has flashed light. I do not think Modi will address this question.
K Sankaranarayana Pillai,
Former Minister, Kerala State.

Like (1)

A.B. Pereira

Aug 12, 2014

Crony Capitalism is a major problem, but when coupled with corrupt politicians, it is a disaster for the country. And this has been happening for over 30 years, perhaps since the days of the previous generation of the Ambanis, Tatas etc.
We are fortunate that there are some level headed people like Raghuram Rajan in our Bureaucracy. How I wish that his tenure as RBI Governor coincided with a role for someone like Arvind Kejriwal in ruling the country? There would have been a more equitable development of our country and the gap between the rich and the poor would have been filled up more judiciously. Our current day corrupt politicians, crony capitalists and pseudo- democrat arm chair critics (somewhat like dumb elites) could not accept a Rs 100 crore free water to poor in Delhi (thereby removing the water mafia), but had no word about the huge thousands of crores subsidy given to the elite through the low priced lease lands for the various elite clubs (in the name of Golf, Cricket, Race Course and what not). Crony capitalism and Corrupt governance are both a big bane for our country.

Like (1)


Aug 12, 2014

There is no doubt about it.I agree direct cash transfer is a good way to eliminate middlemen(ie politicians). That is why Adhar was derailed to the joy of politicians.Everybody including the courts,condemned it,thereby condemning the poor. True,Adhar was misused.It is equally true, that anything good is always prone to misuse.That does not mean,you throw the good things away.It is never late to be good.Even now,Adhar should be given its due place,for the simple reason,people came forward to accept it.

Like (1)


Aug 12, 2014

It will continue if goverment is not serious on policy implementation.
1 If some one get reservation for four generation , how others will get chance to grow.
2 After so many welfare BPL population is growing, what is result of welfare policy.
People should be identify taking into different factors . Not only on birth . BPL no should decrease with proper identification, implemention and target to concern authority, not through sarpach.

Like (1)

H K Prakash

Aug 12, 2014

Quite a few of these billionaires must be like V.J. Malaria. Bribing, making "social worker" friends, giving stake to "social worker" so SW can save him from banks' prosecution. Making rubbish comments that sick co. will not CONTAMINATE his other companies. Donating 10 kg gold to God and starving his employees. Cheating public sector banks. Daily go-go parties at his Bangalore farm (=whore?) house. If I see him I want to spit at him showing my utter contempt for this buffoon. Oh yes, his son after going thru the entire Bombay model/ starlet crowd is now in Hollywood eyeing the starlets and models there!

Like (1)
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