Share your billions with our billion

India's uber-rich should use their wealth to build and redistribute

The last few years have created a host of new billionaires in India, though I must hasten to add that the recent carnage in the markets has made many of them poorer. America's Gilded Age (1877-91) was followed by the Progressive Era, when personal wealth was ploughed into philanthropy, and business growth was funneled into prosperity for all. What turn will India take?
We can harness the innovative power of our large corporations to create a highly productive economy, creating jobs for millions of workers. Alternatively, we can end up as a Russia-style oligarchy, with wealth concentrated in the hands of a few business houses and a highly unstable society.

India's recent growth has created billionaires like Vanderbilt, Carnegie, Rockefeller and Morgan from America's Gilded Age. Indian billionaires control more of their country's wealth than billionaires in any other country, except Russia.

India has 55 billionaires, with a total wealth of $340 billion. Four of the top 10 billionaires in the world are Indian. Indian billionaires' wealth is equal to about 31% of India's GDP, and there are 50 billionaires for every trillion dollars in GDP.

Russian oligarchs have wealth that is equal to about 36% of GDP and there are 67 Russian billionaires for every trillion dollars in GDP.

For China (including Hong Kong), the equivalent figures are 6% and 19.

For Brazil, it's 5% and 14.

In the US, by far the wealthiest country in the world with 469 billionaires, the equivalent figures are 12% and 34.

Cornering tactics

Like the Barons of America's Gilded Age, India's new billionaires have figured out at least three different ways to tilt the competitive playing field to their benefit. These are:

• Securing rich natural resources such as mines and land;
  
• Ensuring favourable regulations in various industries;
  
• Restraining the entry of foreign competition.
  

Rich natural resources have been secured by using the state's legal and eminent domain power. For instance, Central and state governments can use the 1894 Land Acquisition Act to seize land from its existing owners for 'public purpose'. In the past, public purpose meant land for highways, government buildings, airports and dams. Today, governments are using eminent domain powers to seize land for industrial and commercial projects such as SEZs, the erstwhile Tata Nano factory at Singur, and the real estate that will support the Taj Expressway. The government only has to pay farmers the prevailing market value for agricultural land. Once the land has been purchased at these low prices, it is used for industrial, commercial or real estate purposes, and its value increases manifold. Tremendous wealth is generated in this transfer of land from farmers to companies.

Most of the mineral resources in India, except for coal, are owned by the state governments. Surface rights owners (farmers, tenants, tribals, etc) do not have mineral extraction rights. These extraction rights are allocated entirely by the state governments. In most cases, these extraction rights are granted in an opaque manner. As a result, there have been several disputes regarding the allocation of iron ore bauxite and zinc mines, with various parties alleging corruption in the allocation process.

Another method to tilt the playing field is by ensuring favorable regulations at the industry level. There are many ways to set up regulations for the benefit of one set of players, and hinder free competition. As per Ministry of Civil Aviation regulations, an Indian airline is not allowed to fly an international route unless it has at least five years of domestic flying experience. Mumbai's FSI limits, freed only recently, are another example of market regulation that benefited entrenched real estate players, making it impossible to add supply to the super-expensive South Mumbai market. For many years, telecom policy allowed mobility for GSM phones, but not for CDMA phones.

The restrictive market entry rules for international companies has created many Indian billionaires.

In many industries (such as retail, telecom and insurance), the government has allowed foreign companies to progressively own first 24%, then 49% and finally 74% of their Indian companies.

Ostensibly, this was to 'protect' Indian companies from unfair international competition. Instead, it has become a lucrative exit route for many Indian business houses. Many other industries allow for automatic 100% ownership of an Indian subsidiary—for example, in IT services and BPO.

International companies entering these industries have not formed joint ventures with Indian business houses. They have hired or transferred native Indians to run their Indian subsidiary, and have done exceedingly well.

Progressive shift

Now that there has been such astonishing wealth creation in India, we must ensure that we move from a Gilded Age to a Progressive Era.

First, we must strengthen our regulatory and judicial systems to ensure free and fair competition. We must also introduce legislation to allow easy entry for foreign competitors. This will improve market functioning and increase public welfare.

Second, we must privatise our PSUs and enable them to compete on a level playing field with their private sector peers. There are several industries like aviation, telecom, insurance and banking where PSUs compete with private players. Government control restricts PSUs in many ways, enabling private companies to take market share away from weaker PSUs. Privatisation is the only way to ensure that the public benefits from the value built by the PSUs over decades. Capital raised in the privatisation process can also help bridge India's massive budget deficit.

Third, we must reform our tax system to encourage a true democracy rather than create an entrenched aristocracy. India has no estate taxes. The wealthy pass on wealth to their heirs without paying estate taxes on their death. Most developed countries have estate taxes of 20-70%. Further, individuals do not have to pay personal taxes on dividends. As a result, Indian promoters pay dividends to win market share themselves through their companies. Effective corporate tax rates range from 15-20% due to various tax concessions, tax-free zones, accelerated depreciation schedules, and so on. Thus, promoters pay low corporate taxes on profits; further they distribute much of these profits to themselves as dividends, thereby avoiding income tax completely. India also has no long-term capital gains tax. Thus, wealthy Indians can accumulate shares, property and other assets, and not pay any tax on sale. Implementing estate, dividend and capital gains taxes over a threshold would be a simple way of reforming the tax system. Only the top 1% would have to pay these taxes, while 99% of Indian citizens would continue not having to pay any of these taxes.

Finally, our billionaires could become world-class philanthropists in the mould of the Carnegies, Rockefellers and Morgans. The Gilded Age philanthropists endowed thousands of colleges, hospitals, museums, academies, schools, opera houses, public libraries, symphony orchestras and charities.

India is justly proud of its free-market democracy. However, market economies require free and fair competition monitored by strong regulators and supervised by the judiciary and the legislature. In addition, mature democracies require a tax system that prevents the accumulation of great wealth over generations.

Without these institutions—which the public has to demand and politicians have to deliver—we will drift towards an oligarchy, and eventually to an entrenched aristocracy.

We have seen how such societies operate, and it is ugly.

This article appeared in Outlook Business in the Nov 1 issue.

November 3rd, 2008

by jayantsinha