The Changing Nature of Indian Capitalism – By Saurabh Mukherjea

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When it comes to corporate life, the conventional negative narrative unfolding around India is that of crony capitalism.

The conventional narrative …

Since political parties regularly accuse each other of crony capitalism and the media love to tell stories about billionaires who have played with the system, it has become the default mental model used by many to understand India. Indeed, famous books are written on this subject, including the book by James Crabtree written three years ago, “The billionaire Raj”.

… does not do justice to India

Nevertheless, as I explain below, the conventional narrative around scams and buddies doesn’t even begin to describe the scale of the challenges or the opportunities India faces as it tries to transform this that the World Bank calls a lower middle income country with a per capita income of about $ 2,000 to an upper middle income country – which are nations with a minimum per capita income of $ 4,000.

Let me start with the challenges in India before moving on to the opportunities

As my colleagues and I described in our new book “Diamonds in the dust: a coherent composition for the creation of extraordinary wealth”, the main challenge facing India is the brutality of business owners who are not buddy capitalists – they’re just corrupt businessmen. Many of these businessmen go unnoticed – these are not household names and when they run away from India after plundering billions from their shareholders and lenders it is not the headlines .

In our book, we took a look at this underbelly of Indian capitalism, the companies that have dramatically diminished your net worth, although you might not know it. For example, we have described at length a company called Cox & Kings Ltd. The company has a long and interesting history, but if you take a close look at the accounts of the company, as the Law Enforcement Branch recently did, you find that billions of dollars, collected in stock exchange and banks – have disappeared.

While we have used forensic accounting techniques to show how the money went, what is interesting is that for almost a decade my colleagues read Cox & Kings accounts and were left bemused as to how the money went. fact that this company was still able to raise so much money. Why Did Investors Disregard Cox & Kings’ Published Financial Statements? Or Amtek Auto or Dewan Housing Finance – companies whose accounts we’ve broken down in our new book.

Most of these companies are in sectors where the role of the state is modest at best. Therefore, by focusing on crony capitalism, we run the risk of focusing on yesterday’s narrative while seeking remedies for today’s problems.

Two other facets of modern India that pose immense challenges as well as opportunities

Over the past decade, India has been economically integrated as a nation. The national road network has doubled. The number of people taking domestic flights has more than quadrupled. The number of people with broadband connections has increased 50-fold over the past ten years. Thirteen years ago, when I immigrated to India, one in three families had a bank account. Today almost all families have a bank account. And of course, the goods and services tax has significantly integrated the economy over the past four years.

India’s integration has ceded a decisive advantage to well-run and efficient companies that are spreading their wings nationwide and in so doing wipe out small local and regional franchises. For example, as the economy integrates, lending, which was once dominated by regional players, is now seeing the emergence of a few national leviathans like HDFC Bank Ltd. and HDFC Ltd., the two lenders now firmly in the top 20 list. profit generators in India. Likewise, if you look at the roughly 70 unicorns that have been created in India, almost all of them are in some form or form that formalizes and consolidates informal and dispersed industries, for example. taxi transportation, food delivery, poultry consumption, groceries and education.

The United States experienced this phenomenon in the half century preceding the Great Depression. Japan developed in much the same way in the half century following World War II. Ditto for South Korea after the Korean War.

At the same time, India is experiencing the same technology and data opportunities as the Western world i.e. smart lenders, insurers, retailers and consumer goods companies are collecting data on your and my income and spending habits and tap into our digital footprint to navigate their way around this vast and complex country teeming with opportunity.

In “Diamonds in the dust”, we have provided case studies of extraordinarily capable companies like Asian Paints, HDFC Bank, Kotak Bank and Pidilite who have built extremely powerful franchises in India by harnessing technology in the context of the modern Indian economy much more skillfully than their competitors.

In doing so, these successful Indian companies validate what John Sutton of the London School of Economics wrote 30 years ago in a premonitory book titled “Sunk costs and market structure”. Sutton predicted how the application of modern marketing techniques, R&D and technology would lead to the polarization of profits.

Case study illustrating John Sutton’s theory in an Indian context

In 1970, Asian Paints invested Rs 8 crore in the first supercomputer purchased by a private sector company in India. Asian Paints then used this computer to collect detailed paint demand data – across its extensive dealer network, for every color, for every truckload delivered to every dealer. As a result, the management of Asian Paints has developed a greater familiarity with understanding and managing data than any other painting company in India. During the 1980s, 1990s and to the present day, they fed this data into increasingly sophisticated software platforms that helped them forecast demand, plan their raw material purchases, and manage their commodities. stocks and their production cycles.

An extremely tight working capital cycle has given Asian Paints free cash flow 8 times that of its competitors. The company has reinvested this cash flow in capacity expansion (which has increased 15-fold over the past 25 years) and other technology investments, for example, around cost optimization and 3D visualization technology in its “Beautiful Homes”.

This dynamic creates a synergistic spiral that makes it difficult for Asian Paints’ competitors to compete with the company (i.e. Asian Paints has better technology and more data and therefore better cash flow, which which in turn leads to greater technological investments on the part of Asian Paints, which in turn leads to more cash flow and so on). Having increased free cash flow over 70 times over the past 20 years, Asian Paints is one of India’s most consistent product makers.

You might ask “Why is this relevant to me?” ” Here’s why…

The two facets of India that I have just outlined are transforming the business landscape. Today, no more than 15 companies account for 90% of all profits generated in India. Ten years ago, the corresponding figure was just over 30%.

Given this immense concentration of profits in the hands of a few companies, it should come as no surprise that just 16 companies accounted for 80% of the wealth generated by the Nifty 50 over the past decade. By the way, very few of these companies are crony capitalists.

What does this portend for India as a nation?

At first glance, the question “how can we prevent corrupt companies from stealing money from investors?” Sounds very different from the questions “Who owns this data that you and I generate when we turn on our smartphones?” Does the company own it? Does the customer own it? Or does society as a whole own it?

However, all of these questions represent what economists call “a tragedy of the commons,” that is, a situation in which individual users – who have free access to a resource – act independently in their own interests and contrary to the common good of all. users.

I don’t know how to fix these issues, but I know people who have given these questions a lot of thought. In their book “Greed is dead”, Sir John Kay and Sir Paul Collier highlight the work of “Elinor Ostrom, the political scientist who received the Nobel Prize in Economics for her studies on small communities who had built social conventions that overcome the” tragedy of the commons.

Ostrom’s remedies for such problems had three dimensions which I think are relevant to India.

Beyond the investment world, in India we have seen such a civil society-led intervention – as Ostrom’s research predicts – work very effectively during the Covid-19 crisis. With the help of social media, a complex and interactive network of volunteers, medical professionals, donors and government officials have come together to guide India through the second wave.

As James Crabtree explains in “The billionaire Raj”America a century ago tackled problems similar to those we face in India today. The fifty years of American economic integration before the Great Depression paved the way for the “progressive era” where middle-class Americans addressed the problems created by industrialization, urbanization and political capture. A proactive middle class has catalyzed the creation of new institutions in the richest democracy in the world. A century later, a proactive Indian middle class can spark a similar process in the world’s largest democracy.

To note: Asian Paints, HDFC Bank, Kotak Bank and Pidilite are part of many portfolios of Marcellus Investment Managers.

Saurabh Mukherjea works for Marcellus Investment Managers. Marcellus’ new book, “Diamonds in the Dust: Consistent Compounding for Extraordinary Wealth Creation” has been published by Penguin.


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