Indian capitalism's stress test

The Adani crisis is the greatest stress test for Indian capitalism yet. So far, India has passed it, with almost 10/10

This week’s National Interest isn’t about Gautam Adani. This is, instead, about Indian capitalism. This is the toughest stress test for Indian capitalism in our independent history. Or, more precisely, post-1991 history. Since the expansion, opening up, and modernisation of Indian markets began in the summer of 1991, many crises have struck it periodically.

Among these were Harshad Mehta, Ketan Parekh, Fairgrowth and others. Each one held out a crippling threat to Indian markets and to the new equity culture among common Indians, which is so crucial to a new capitalism.

Each rocked Parliament, pauperised many well-meaning investors and sent some crooks to jail, if briefly. But there are five crucial differences between these and now:

*None of these crises arose when the Indian markets and economy were globally integrated.

*These were crises of domestic markets where domestic interventions, either by financial or regulatory institutions — or even a phone call from North Block — could make a difference. The latest one is playing out fully in global markets and, more importantly, international media.

* The old crises — check out the so-called KP-7 (KP for Ketan Parekh) for example — mostly concerned Indian companies doing the bulk of their business in India. This one is about India’s most globalised corporate.

*The earlier crises emerged here, and the whistleblowers or investigative journalists who exposed these were Indian. This one has been triggered by a very foreign and tiny financial institution.

* The fifth, and the most significant, difference from the standpoint of this column — is that those who’ve created this kerfuffle aren’t whistleblowers. Nor are they activist shareholders. They are coming at it purely for profit. They are short-sellers. They have a fully disclosed vested interest in bringing down the share price of a company they’re “investing” in by short-selling its US-traded bonds and non-Indian-traded derivative instruments.

The reason we list this fifth difference as the most critical is simple. When foreigners invest in our companies, when our companies list overseas, when the world sings our praises, when foreign direct investment (FDI) and foreign portfolio investment (FPI) figures zoom, we celebrate. Do we, at the same time, have the nerve to take the downside that comes with it? One, that we, our government, financial institutions or regulators can no longer influence or arm-twist this all-powerful entity called the “market”.

Two, the need to accept that even what looks like a bunch of young upstarts can look to make mega profits by taking down one of your biggest conglomerates in the market. Markets in good capitalism have no nationalist lens. If money has no colour, it also carries no passport. And those who play in the market love their money first. All, national, political or ideological loyalties come next.

It is for all these reasons that we call the ongoing crisis the greatest stress test for Indian capitalism yet. And as we conclude the first full week of the market action on this, we can acknowledge that so far, Indian capitalism has passed that test. In fact, with a score of almost 10 out of 10. Surprised?

Almost two weeks into the crisis, the Modi government hasn’t said a word about it. None of the regulatory institutions has intervened in the market in any manner whatsoever, least of all as if to help the Adani Group absorb the blow better. The conglomerate has been left to its own devices. If at all, the NSE has done the usual — and prudent — thing of increasing margin payments to curb excessive speculation. This is fully the NSE mandate in a situation of heavy volatility.

While the conglomerate called it a foreign conspiracy to attack and damage India and its institutions, the government, the entire finance ministry establishment, regulators, and the ruling party leadership have all kept mum. Never mind the flag.

If India’s most powerful political establishment in almost five decades responds to a situation like this as if it’s something that must only play out between a corporate and the market, it is the coming of age of Indian capitalism. It is as if “let the market take its course” is the new “let the law take its own course”.

Think, on the contrary, what would have followed if the mighty Indian state had acted in the way it might have when our political economy was less evolved. Really bad ideas like the suspension of trading and the launch of investigations against the “greed, amoral, and what-have-you” short-sellers could’ve found currency.

Even the whiff of such a false step, would have done enormous damage to India’s markets, the global trust on which a booming new economy rides, and indeed to our still very adolescent capitalism. And please do not say this talk is nonsense, that no such thing would ever be possible. The scar of the retrospective Vodafone amendment on global trust in India is still to heal fully. We have to be grateful that such ideas aren’t floating now.

Essential to the embrace of capitalism is the acceptance of the fact that losses are as much a part of business as profits. Nobody can pass a law mandating only profits in the markets.

That’s why mutual fund sellers keep repeating that statutory warning: Mutual fund/equity investments are subject to market risks. It’s also because these investments involve risk that governments tax capital gains on equities and equity mutual funds at lower-than-normal rates. The lesson for common folk, therefore, is not to get irritated when that statutory caution is repeated in so many advertisements between overs during your T-20 live telecast. Losses are as much a part of the market as profits. Hindenburg has only underlined to us that you can also make profits from “losses” if you are a short-seller with nerve — and information.

The reason the market, particularly one as large and spread out as India’s, is so powerful is that it can never be identified with any individual. Not one, not many, not even a cohort. Think of it as a mob of anonymous moneyed millions. There is safety in numbers. Which is further fortified by that one-line ideology that governs the market: I love my money.

People can follow this god or that, vote for one party and detest another, love one football or IPL franchise and hate another. But they will never let any of this affect their choices on the market.

The only thing that matters here is “my money”. Of course, I can make the wrong choices, but never because of my politics, religion or loyalties. This is what makes money the most secular god of all. Which, in turn, makes the market the most powerful monarch. Or at least in the world of capitalism.

If you are in the market — never mind whether as a corporate, conglomerate, broker, banker or even an ordinary day-trader or investor — understand the fundamental law that applies: May you be ever so high, the market is above you.

In this round, the market has won. But it is still for Gautam Adani now to decide whether he has lost or not. Accepting defeat would mean continuing to fret and fight with the market, with money or other clout, finding shelter underneath the supposedly ulterior motives of the short-seller.

The other way would be to take the blow with humility, a bad day in the market. Focus on the many good and bounteously cash-yielding businesses and assets more sharply, rebuild what just got broken, and hope that the market will love you again in the course of time. This would be good capitalism.

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