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Sunday, August 01, 2021

Death of enterprise

The Indian economy’s crisis is not of GDP growth, but a drying up of animal spirits

Written by Harish Damodaran |
Updated: June 29, 2019 1:31:48 am

entrepreneur, entrepreneurship, infosys, wipro, oyo rooms, indigo, demonetisation, gst, indian expressThat period after 1991 saw the emergence of new capitalists, and also the rise of the old not-so-big, on an unprecedented scale.

“Nobody ever is an entrepreneur all the time, and nobody can ever be only an entrepreneur,” wrote Joseph A Schumpeter in his 1939 classic Business Cycles. Equally famous is the passage from John Maynard Keynes’ A Treatise on Money (1930): “If Enterprise is afoot, wealth accumulates. and if Enterprise is asleep, wealth decays”.

Truth be told, entrepreneurship in India is today comatose, if not dead. And it has been for much of this decade. For proof, one need just look at the first two decades after economic reforms. That period after 1991 saw the emergence of new capitalists, and also the rise of the old not-so-big, on an unprecedented scale.

Their firms belonged to diverse sectors: IT (Infosys, Wipro, HCL, Satyam); pharmaceuticals (Sun Pharma, Dr Reddy’s, Aurobindo Pharma, Biocon, Serum Institute); automotive components (Motherson Sumi, Amtek Auto); aviation (Jet, IndiGo); telecom (Airtel); infrastructure & mining (Adani, Vedanta, GMR, GVK, Lanco, Navayuga, IRB, IVRCL, Soma Enterprise); banking & financial services (Kotak Mahindra, Yes Bank, Indiabulls, Shriram Group, Dewan Housing, Edelweiss, Motilal Oswal, JM Financial, India Infoline); media (Zee/Essel, Sun Group, Network 18, NDTV); gems & jewelry (Rajesh Exports, Su-Raj/Winsome Diamonds, Gitanjali); modern retail (Future Group, Kalyan); and renewable energy (Suzlon). Many of these were relatively new industries that had benefitted from globalisation or been liberalised for the entry of private players.

But this period was also about “new” entrepreneurs in “old” sectors: textiles (Alok Industries, Welspun, Trident); sugar (Shree Renuka); dairy (Hatsun Agro); rice milling (KRBL); and farm solutions (UPL, Jain Irrigation, Mahyco, Nuziveedu Seeds). Besides, there were “old” corporate houses that did things no less entrepreneurial by going global or foraying into new areas: Tatas, Reliance, Aditya Birla, Mahindra, Hero, Bajaj, Essar, Godrej, RP Goenka, Thapar, TVS, Amalgamations and Murugappa. Even the likes of Jaypee and DLF were middling concerns till the 1980s; they became big — the former in cement, power and construction, the latter in real estate — only during the Nineties and Noughties.

The current decade, by contrast, has been marked by a general decline in the supply of what Schumpeter called New Men. Such entrepreneurs, whose growth is a phenomenon of not beyond 10 years, can be counted on the fingers of, maybe, three hands: Patanjali Ayurved, Flipkart, Paytm, Snapdeal, OYO Rooms, Ola Cabs, BigBasket, Byju’s, Zomato, Swiggy, InMobi, Bandhan Bank, TeamLease, Dilip Buildcon and Ashoka Buildcon. Most — barring Patanjali (FMCG), Bandhan (banking), TeamLease (human resources outsourcing) and the last two names (construction) — straddle a narrow business segment of e-commerce or mobile-enabled services.

However, the real story of the third decade of reform isn’t about new but destruction of existing enterprise. For that, one has to merely identify companies/groups that have been neck deep in debt or gone belly-up in the last 6-7 years. An illustrative list, by no means exhaustive, includes Essar, Jaypee, Videocon, Reliance (Anil Ambani), UB, Jet Airways, Zee, Ballarpur Industries (Thapar), GMR, GVK, Lanco, IVRCL, Soma, Jindal Steel & Power, Bhushan, Electrosteel, Braj Binani, Ruchi Soya, Alok Industries, S Kumars, Amtek Auto, Suzlon, Moser Baer, Nagarjuna Fertilisers, Punj Lloyd, KSK Energy, Era Infra, Dewan Housing, Hindustan Construction, Bajaj Hindusthan, Shree Renuka Sugars, JBF Industries, Unitech, Gitanjali Gems, Winsome Diamonds, Jain Irrigation and Sintex Industries. Many of their promoters are reforms’ children, whose capital, accumulated in the first two decades after liberalisation, has undergone destruction.

The above destruction isn’t of the “creative” kind that Schumpeter referred to, as there’s very little new capital or enterprise replacing what has suffered ruination. Arvind Subramanian has recently claimed that India’s annual GDP growth during 2011-12 to 2016-17 may have averaged just 4.5 per cent, as against the official estimate of about 7 per cent. The crisis after 2011-12, though, is not about growth slowdown or credibility of the new GDP measurement methodology. It’s about the death of enterprise and a drying up of animal spirits that Keynes defined as “a spontaneous urge to action rather than inaction”. When there are no New Men and the old still-surviving ones have gone into their shell — even Reliance Industries and Tata Sons are engaged in deleveraging and consolidation, as opposed to investing — this is an existential crisis for Indian capitalism, no less.

The present crisis hasn’t suddenly come like a heart attack, but spread silently like a cancer. The warnings were there. The “twin balance sheet” problem, a UPA regime legacy, was diagnosed in the Finance Ministry’s Mid-Year Economic Analysis report of December 2014. Yet, only in June 2017 did the Reserve Bank push banks to refer the first lot of highly-indebted companies for bankruptcy proceedings. By then, the “stressed” loans of state-owned banks had crossed 16 per cent of their outstanding advances. In the meantime, we had the twin shocks of demonetisation and Goods and Services Tax (GST). However, according to government data, average GDP growth during January-September 2017 — the period when these would have caused significant disruptions — was a decent 6.6 per cent year-on-year, rebounding to 7.7 per cent and 8.1 per cent by the October-December 2017 and January-March 2018 quarters.

Whether it was demonetisation, GST or crash in agricultural produce realisations, the dominant discourse in policy circles as well as India Inc was that their effects were, at worst, temporary. Low farm prices, if anything, helped slay the food inflation monster. Inflation, as the Prime Minister correctly noted, was “absent” as an election issue for the first time. Demonetisation and GST’s impact was primarily on micro, small and medium-sized enterprises that did business in cash and paid no tax. Organised players, including listed companies, were expected to weather the storm better and even gain market share ceded by the informal sector.

But since around October, even the big guns have been feeling the heat, with sales of everything — from cars, two-wheelers and trucks to consumer staples — slowing down. Worse, nobody knows when growth is returning. The slowdown now clearly visible could be the cumulative result of an extended investment famine, which, together with demonetisation, GST, agrarian distress and high real interest rates, has taken a toll on incomes and spending. Behind it all, like an insidious cancer, has been the death of enterprise.

While Schumpeter was right that everyone cannot be an entrepreneur all the time, reviving the animal spirits of those who can be is important. Without such men and women, willing to put money in projects not yielding immediate returns, there can be no sustainable recovery.

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