India?s truly rich suffered a momentous fall in wealth in 2008. According to Forbes, in February there were almost 50 billionaires in India, worth $278. By November the wealth of this group had fallen to $116 billion, and many were no longer billionaires. Is this cause for concern or celebration? Let?s put the numbers in perspective. In 1996 there were only two billionaires, worth $3 billion, amongst Indians living in India. By 2001, the number had risen to 4, worth $14 billion. And even after the fall in 2008 the total wealth of billionaires was still above the 2006 level.
The immense absolute expansion also saw a striking relative expansion, in relation to GDP, and in relation to other countries. Take the ratio of billionaire net worth to GDP. On this measure India hardly appeared in the charts in the mid-1990s, and was way below other developing and industrialised countries. By 2007?before the 2008 roller coaster?by this indicator India had leapfrogged all Latin American countries, including Mexico, a country renowned for its billionaires. It was also above the United States, around the same as Israel and Malaysia, and only significantly less than Russia, Kuwait and Saudia Arabia.
Is billionaire wealth a sign of India?s extraordinary business success at home and abroad? Or a socially intolerable manifestation of extreme wealth in a society where most are still poor by global standards? Does it presage long-term dynamism or rising capture of the state? As often in India, there is probably some truth in all of these.
Take first the view that billionaires are a manifestation of the triumph of Indian capitalism. Billionaire wealth is primarily linked to corporate performance in family-controlled business groups, especially in industry, services and mining. Dynamic individual entrepreneurs innovate, take risks and have the capacity to raise money. The emergence of the IT industry was an iconic example.
Family-based capitalist enterprise has indeed been central to growth in most, if not all, historical cases?the United States in an earlier period, much of Europe now (including Sweden!), Japan, Korea, Malaysia, Indonesia, Thailand and so on. Family-controlled business groups bring many advantages. Concentrated control over resources, backed by internal trust, helps solve failures in markets for capital, innovation and human resources, failures that are deep and widespread in India. Even influence over the state can bring advantages?making firms more tolerant of risk, more likely to provide a counterweight to an overbearing Indian state, and inducing better delivery of complementary infrastructure.
However, there are also downsides. Concentrated corporate wealth can lead to oligarchic capitalism, in which concentrated market power allows businesses to benefit from preferred treatment?in contracts, access to land, continued protections?and undercuts the autonomy of the state. Mexico provides a vivid contemporary parallel: billionaire wealth is there associated with high costs and high rents. These costs are holding Mexico?s growth back.
Some may argue that the power of markets will be sufficient check on abuse. But this applies to some activities. Mexico has a free trade area with the biggest market in the world. And one thing the financial meltdown of 2007-08 has shown is that corporate-financial systems have an extraordinary capacity to obfuscate the information in the interests of those who own or control business. Earlier corporate scandals of Enron and elsewhere took place in the information-rich society of the United States.
History has other lessons. The great era of buccaneering entrepreneurs in the United States was that of the robber barons in the late 19th Century. They built the railways and a lot else besides, and created vast wealth for themselves. This occurred in one of the most open economies in the world in terms of firm entry. There then emerged major concerns over excessive market power and influence, leading to the anti-trust movement of the early part of the 20th century. This involved concerted action by the state, backed by social and political movements in society, and led to the creation of economic institutions that broke up the trusts.
Unleashing corporate energies has been an important part of India?s economic restructuring and growth. Given the structure of ownership, creation of billionaires was a corollary of this, as manifested in the long-run increase in wealth. But extreme wealth is not a necessary condition for corporate dynamism. It is in the interest of both the business community and society to pursue the development of the economic institutions, competitive structures, political finance reform and societal checks and balances, that will foster dynamic competitive capitalism and a reasonable sharing of the fruits of corporate expansion. Implementing the 2002 competition law would be a good start.
?The author is at the Harvard Kennedy School, the Institute for Social and Economic Change, and the Centre for Policy Research
