Indian Business.Indd 1 11/10/2011 13:32 SPECIAL REPORT BUSINESS in INDIA
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SPECIAL REPORT BUSINESS IN INDIA October 22nd 2011 Adventures in capitalism Indian business.indd 1 11/10/2011 13:32 SPECIAL REPORT BUSINESS IN INDIA Adventures in capitalism Indian businesses are rewriting the rules of capitalism in a distinctive and unexpected way, says Patrick Foulis ON AUGUST 1ST India’s nance minister, Pranab Mukherjee, gathered CONTENTS the country’s senior businesspeople for a pep-talk in New Delhi. The event (pictured) was notable for two reasons. First, the subject of discus- 4 Family rms sion was the wobble in condence that has taken place over the past The Bollygarchs’ magic year. Although a mini-industry has arisen of India optimists who predict mix that the country’s entrepreneurial spirit will make it an economic super- 7 Inbound and power over the next two decades, many business folk on the ground feel outbound deals disillusioned. They worry that India’s notorious red tape, graft and lack Their oyster, with grit of infrastructure are nally catching up with it. Largely unnoticed abroad included and eclipsed by the rich world’s sovereign-debt crisis, the Indian econ- omy has hit a sticky patch, with investment slowing, ination high and 10 Innovation and growth expected to dip to perhaps 7%, from a peak of 10%. After two and a cost-cutting half hours, needless to say, the bosses emerged and expressed boundless The limits of frugality optimism with the gru air of men in the grip of a half-Nelson. 11 State-controlled rms The second surprise, given India’s reputation as a land of red-hot The power and the start-ups and new entrepreneurs, was the dynastic nature of those cap- glory tains of industry. They included Ratan Tata, the fth-generation head of Tata Sons, a conglomerate; Anand Mahindra, the chief executive of the 12 The outlook for Mahindra group, which was co-founded by his grandfather; and Anil entrepreneurs Ambani, who inherited a chunk of the Reliance empire built by his fa- Looking for the next ACKNOWLEDGMENTS ther. The main representatives of rst-generation entrepreneurs were Infosys In addition to those mentioned and Shashi Ruia, who built the Essar group with his brother and who has 13 The Indian miracle and quoted in the text, the author handed day-to-day management to his son; and Sunil Bharti Mittal, who the future wishes to thank the following people controls India’s biggest mobile-phone operator, and whose son recently Rolls-Royces and for their help: Devendra Amin, joined the rm after a stint as an investment banker in London. True, not Pradipta Bagchi, Uday Baldota, Arun pot-holes Bhagat, Indrani Bhattacharya, all Indian rms are dynastic: Y.C. Deveshwar, a veteran business leader, Debojyoti Chatterjee, Phiroza Choksi, attended in his capacity as chairman of ITC, a rm controlled by institu- Shravani Dang, Anindya Datta, Mira tional investors, rather than a family. But ITC has become the kind of con- Desai, Charudatta Deshpande, glomerate that Western textbooks advise against, spanning everything Shubhada Dharwadkar, Suprio Guha, from stationery, cigarettes and spice-grinding to noodles and hotels. Sarika Kapoor Chokshi, Andrew A list of sources is at Lorenz, Kulsum Merchant, Jimmy Amid the barons and conglomerate bosses, the only man who rep- Economist.com/specialreports Mogal, Pankaj Mudholkar, Sachin resented a recognisably contemporary Western vision of the corporation Mulay, Christabelle Noronha, Kirsten was N.R. Narayana Murthy, the lead founder of Infosys. It is focused on An audio interview with Paul, Prasad Pradhan, Dr Pragnya the author is at Ram, Mahesh Shah, Capt Kunal one business line, computer services, which are mainly sold to rich coun- Economist.com/audiovideo/ Sharma and Milya Vered. tries. And it is owned by diuse institutional shareholders, has gold-stan- 1 specialreports The Economist October 22nd 2011 1 SPECIAL REPORT BUSINESS IN INDIA India’s top 20 listed firms Controlled by: by market capitalisation State Larsen & September 2011, $bn State Bank Family of India Toubro 26.1 20.8 Foreign Tata Consultancy Diffuse Reliance Industries Services owners 57.2 42.6 ITC Bharat Heavy Coal India 32.5 Electricals 50.7 HDFC Bank 17.4 23.9 Mahindra Bharti Airtel & Hindustan Mahindra 31.0 Jindal ICICI Bank Unilever Steel Oil and Natural Gas 10.3 & Power 21.6 15.5 10.8 49.7 Tata Motors Infosys Sun 10.2 NTPC Housing Pharmaceutical 29.1 Development Wipro 30.1 Finance 10.6 20.6 17.6 Sector weights in the BSE 100 index, % Basic materials, Consumer and Financials Industrials Technology utilities and energy 31.0 24.5 health care 17.1 14.3 and telecoms 13.1 Source: Bloomberg 2 dard corporate governance and accounting, and in the next four brainpower, complex algorithms, knowledge workers, call cen- years is expected to wave goodbye to the last of its founders still tres, transmission protocols [and] breakthroughs in optical engi- playing an executive role. It is a corporate fairy tale: in a single neering as the new sources of wealth, many of the latest gener- generation Infosys has leapt from a start-up, founded by a hand- ation of Indian oligarchs made their cash from old-fashioned ful of engineers with $250, to global blue-chip company. The In- things like roads, mines, energy and property. In short, India has fosys vision of Indian capitalism was popularised by Thomas not conformed to anyone’s template. It has gone its own way. Friedman, an American journalist who had an epiphany after What does this new kind of capitalism look like? An im- playing golf in Bangalore and meeting Infosys’s chief executive. mense, often unrecorded informal sector employs the majority Mr Friedman went on to write the 2005 bestseller The World Is of Indians. But in terms of value addeda Flat. It described an India of buzzing entrepreneurs and start- crude way of measuring activity that is ups, turbocharged by the internet, outsourcing and global com- used by economistsIndian capitalism is municationsa kind of giant Silicon Valley with worse roads concentrated. In 2007 a government sur- and spicier food. In the years since, perhaps reecting the woes vey of almost 200,000 services rms, for- of the West and the rise of China’s state-backed approach, some mal and informal, concluded that the top observers have been less restrained, celebrating a reassuring In- 0.2% of them accounted for almost 40% of dia of a billion innovators who, through a bottom-up revolution, output, and that companies in two states, would propel their country to prosperity. Maharashtra and Karnataka, which host Just as Lenin hoped Russia could skip a Marxist phase or the commercial hubs of Mumbai and two and jump from agriculture to communism, so these cheer- Bangalore, collectively accounted for leaders hoped India could leap from sclerotic socialism, which about half of output. Next, look at the stockmarket. It is not an ideal proxy for India Inc, but it is Cheerleaders hoped India could leap from sclerotic the only reliable one. About 70% of its val- socialism towards a Western form of institutionally run ue sits in the BSE 100 index of the largest rms, the smallest of which is worth just capitalism. But that is not how things have turned out under a billion dollars, below which a rm is considered a tiddler by global stan- prevailed between independence in 1947 and liberalisation in dards. As a group, these businesses have a return on equity that 1991, towards a Western form of institutionally run capitalism. has declined in recent years but remains solidly in the mid-teens, But that is not how things have turned out. Infosys has just been making Indian rms more protable than many of their Asian overtaken as India’s most valuable computer-services rm by peers, reckons Anirudha Dutta of CLSA, a brokerage. Debt levels TCS, part of the 143-year-old Tata group. Look at India’s leading are low and growth has been strong, with prots rising sixfold 100 rms by market value and you will not see any others like In- since 2001in dollar terms to $64 billion. fosysblue-chip, focused, diusely owned, created in the past That makes India big, but not that big. It accounts for about three decades and run on non-hereditary principlesbar a few 3% of the world’s stockmarket value. Cheered, feared and jeered nancial rms. And whereas Mr Friedman cited software, at home, India’s giants are mere middleweights on the global 1 2 The Economist October 22nd 2011 SPECIAL REPORT BUSINESS IN INDIA 2 stage. State Bank of India, India’s largest lender, is a tenth of the size of China’s biggest, measured by prots. Reliance Industries, Still ahead of the pack, just 2 a family-run conglomerate with a skew towards chemicals and Return on equity, % energy that is the subcontinent’s most valuable rm, is only a 25 third as big as Total of France. If all goes to plan and India’s econ- India (BSE 100) omy grows quickly it will still be a decade before its rms begin 20 to challenge those of the rich world and China by size. After two decades in which sunrise industries such as mobile telecoms, 15 media, health care and nance have thrived, India’s distribution 10 by sector now looks pretty conventional by global standards (see MSCI Emerging Asia 5 graphic on previous page). + What makes India unusual, aside from its rapid growth, is 0 its form of ownership. Its evolution can be crudely split into – 5 three periods. Until 1991, when liberalisation began, Indian busi- 1997 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 nesses that had not been nationalised were family aairs that Sources: Thomson Reuters; CEIC survived in a world of micromanagement and ocial targets the licence raj, a surreal mix of Soviet stupidity, British pedant- ry and Indian improvisation.