India is not only the world’s largest democracy; its economy has been expanding faster than China’s. This has given rise to a new billionaire class in India. The country’s top 1% own nearly 60% of the wealth. Meanwhile, about 65 million of India’s 1.3 billion citizens live in slums. James Crabtree examines this disparity in his new book, The Billionaire Raj: A Journey Through India’s New Gilded Age. Crabtree, an associate professor of practice at the National University of Singapore and former Mumbai bureau chief for The Financial Times, joined the Knowledge at Wharton radio show on Sirius XM to discuss India’s shifting socioeconomics. (Listen to the podcast using the player above).
An edited transcript of the conversation follows.
Knowledge at Wharton: What is causing this widening inequality gap in India?
James Crabtree: India’s economy has grown very quickly of late to become the world’s fastest-growing economy. This has moved a lot of people out of poverty, and all of that is a good thing. But along with that has come a substantial increase in inequality, and that tends not to be a great thing for countries as they try to develop out of poverty and into middle-income statehood.
Some of that wealth at the top has been created entirely the right way, by world-class companies coming out of India in areas like IT or generic pharmaceuticals. But the problem is that a lot of that wealth has come effectively through crony capitalism, collusion between the business elites and the political elite in areas that have a lot of government regulation. That is much less healthy.
Knowledge at Wharton: Isn’t that similar to what is happening in the United States, where the income gap is also growing larger?
Crabtree: I think that’s right. Many countries have gone through this stage of tumultuous, very rapid early industrialization. It happened in Britain in the 1820s, and it happened in the American Gilded Age after the Civil War. You had a lot of the same patterns there that you see in India today: very rapid wealth creation at the top with the millionaire classes, which were called the robber barons; very corrupt urban politics; mass urbanization; and the creation of a new middle class.
If you were to look at America in the 1880s, you would have been pretty downbeat about the country’s prospects. Then, eventually, things turned around. That’s a lot like what India looks at the moment. There’s lots of inequality, lots of problems, but no particular reason why it can’t improve.
“India’s story on poverty reduction is actually pretty good.”
Knowledge at Wharton: How has this disparity affected those at the bottom of the financial scale in India?
Crabtree: India’s story on poverty reduction is actually pretty good. It wasn’t that long ago, maybe 10 or 20 years, when you had hundreds of millions of very poor people, meaning those living below $2 a day. India is moving pretty quickly to reduce that. It is a case in which the rising tide is lifting certainly many boats, if not all. The problem is more while the progress of the people at the bottom has been pretty good, the progress at the top has been spectacular.
Now, some people don’t have a problem with that. But when you start getting into the territory of Brazil or South Africa — very unequal countries with very entrenched privilege at the top — that’s not very healthy for countries that need to reform and develop. If you look at the successful economies of Eastern Asia — Singapore, South Korea, Taiwan — these countries were all a bit more equal than India is now. If India keeps going on the path that it is on, it gets into quite worrying territory where it begins to look more like an African or a Latin American country than the successes of East Asia.
Knowledge at Wharton: Would a change in leadership alter that dynamic?
Crabtree: India’s prime minister is Narendra Modi, who was elected in 2014 in a landslide victory that was fought predominantly on an anti-corruption, pro-growth platform. He’s expected to win the next election, which is going to happen next year. A change of government could affect that. I think it’s more than likely that Mr. Modi is going to come back, and I suppose the hope is he would introduce policies that will change some of these directions, deliver the kind of technocratic reforms that people thought he was going to do, but also to try and do something to curb the trend towards inequality that you have seen in India.
I think the Indian economic story at the moment is pretty successful. The top-line rate of growth is strong, and you are getting a lot of inward investments. Companies like Walmart just invested $15 billion, $17 billion to buy an Indian startup. Nonetheless, I think India would benefit from what economists sometimes call a more inclusive growth path, which is similar to those which you have seen in places like Thailand, Malaysia and China.
Knowledge at Wharton: Right now, India is seen as a great opportunity for a lot of companies. You would think that foreign investment would benefit the country as a whole, but are you saying it could expand that inequality even further?
Crabtree: No. I tend to think that inward investment is a good thing for India. It’s foreign direct investment (FDI) ranking has been pretty strong; it has attracted a lot of foreign capital, and I think that is, broadly speaking, a good thing. In the end, India wants to have a vibrant free market. The problem is that it needs to have measures that are going to help those who are not being taken along for the ride. It also needs to make sure that the market is operating freely, that this isn’t growth that is predominantly coming from a kind of crony-istic investment.
Over the last 10 years, both of those things have been a bit of a problem in India, so I don’t think there is a contradiction here. I think you can be in favor of plenty of inward investment and the fact that companies from Walmart to Facebook to Google are investing very heavily in India. And I think over the long term those investments are exactly right.
The question is, can India grow steadily at something approaching the rates that China did while having very high levels of inequality and other problems that I deal with in my book, like instability in the banking system and lots of bad debts that have come out of the result of crony capitalism? I think the evidence on that is much more mixed — that if India were to be able to have a more open, competitive, free-market system, as opposed to one that had a lot of corruption and cronyism, it would probably grow more steadily.
Knowledge at Wharton: Isn’t the urbanization in India also similar to what we see here in the United States, with people wanting to live in cities rather than suburban areas?
Crabtree: Well, that’s a good thing. The story of America’s Gilded Age was one of mass urbanization. America before the Civil War was a rural society, and then afterwards it very quickly became an urban one. A city like Chicago had a population of only about 90,000 at the end of the Civil War, and it was up to one million 40 years later. India is a transition of far greater magnitude. You are talking about somewhere between 300 million and 400 million people, which is greater than the population of the United States, moving from villages to cities over the next 20 to 30 years. It is going to be an enormous challenge to manage that, but in the end it’s a good thing. You can’t have productive, environmentally sustainable societies that are based around village agriculture.
The Indian future is an urban one. The question is, can you manage that? How do politics and business adapt to very, very rapid change in the structure of your population? The Chinese managed it, but the Chinese are autocrats, and they also did this at a time when their population didn’t have smartphones. India is a messy democracy, and its population now has smartphones, so it is an entirely different challenge.
“You can’t have productive, environmentally sustainable societies that are based around village agriculture. The Indian future is an urban one.”
Knowledge at Wharton: How important is the political relationship between India and the United States?
Crabtree: It’s one of the most consequential in the world. At a very crude geopolitical level, America backs the rise of India. There’s a balance against China. So, if there are two large superpowers emerging in Asia, then one of them, namely China, can’t dominate. India and America have gotten closer and closer in geopolitical terms and other areas like swapping defense technology. Although Walmart was one big headline deal, there haven’t been many other blockbuster deals by U.S. companies in India. There has been quite a lot of tech investment. Silicon Valley VC’s have been investing in Indian tech companies, and there has been the odd deal here or there, but there is a lot more trade and investment that could occur between these two countries. But in the end, whether or not Mr. Trump and Mr. Modi get on with one another is one of the big geopolitical issues of the next 20 or 30 years.
Knowledge at Wharton: Why hasn’t there been more investment in India in recent years?
Crabtree: It’s partly because of the kind of investment that India needs. India is in a sort of early stage of its industrialization, so it particularly needs investment in things like heavy industry. It doesn’t tend to be what the U.S. specializes in. U.S. manufacturing [includes] companies like GE, and Boeing, advanced manufacturing or services or IT. Germany actually has invested quite a lot in India because it provides more basic manufacturing.
But there is also a function of distance; it’s just a long way away. India is more likely to trade with its neighboring countries. But the raw measure of trade is not the correct way of looking at a geopolitical relationship. As Asia changes very quickly, then both the U.S. and India have good reasons to become more friendly with one another as they look warily at China and its enormous rise. India and China have a very potentially conflicting relationship. They share a very long land border. They have a number of military disputes. And as China has risen, it’s begun to encroach on India’s backyard.
India is still a lot weaker economically and militarily than China is. But China is building relationships with countries all around India, and it has an increasingly strong military. Indians don’t like this very much; they feel like they are being hemmed in their own backyard. And that is partly why, under the previous set of leaders — Mr. Obama and the previous Indian prime minister — America and India were nudging closer to one another.
Under Mr. Trump, this has become rather more complicated because he is a very disruptive figure on the international scene, so Indians aren’t really quite sure what to make of him. He is not such a reliable, steady partner as Barack Obama was. But in some sense, Mr. Modi and Mr. Trump seem to like one another. They are cut from a similar cloth. They are both outsiders in their own sort of political worlds. They both dislike their country’s left liberal heritage. We will just have to see. If Mr. Trump is clever, then he will look to India as a great potential friend as he tries to confront China on trade and on other issues. But it is always hard to tell how Mr. Trump’s diplomacy is going to play out.
Knowledge at Wharton: Will the rise of these new billionaires have a great impact on how India’s cities will be shaped in the next 50 to 100 years?
“Whether or not Mr. Trump and Mr. Modi get on with one another is one of the big geopolitical issues of the next 20 or 30 years.”
Crabtree: It was the thing that most captivated me about Indian business when I moved to India in 2011, so I stayed there for five years. I think if you grow up in the U.K. or the U.S., then you can be interested in business and corporate culture, you can work and cover this as you do and I did. But the notion of a tycoon, a kind of buccaneering business figure, these figures are lost in our culture nowadays.
You have maybe somebody like Elon Musk in the U.S. or Richard Branson in the U.K. who have a similar adventurous spirit, and you do have a few conglomerates left. But these business figures are rare beasts nowadays in our culture. In India, they still rule the roost. I turned up in Mumbai, the Indian financial capital, and I began to learn about the men who appear at the top of the Indian billionaires list. Mukesh Ambani is now the richest man in Asia, who runs a conglomerate called Reliance Industries and whose amazing $1 billion home appears on the front cover of the American edition of my book. I was just captivated by these people. They take risks at a level that is unheard of now in the more restrained corporate culture of the industrialized West. These billionaires who run big conglomerates tend to be great risk-takers. They are captivating, fascinating people. The joy of writing this book was being able to tell some of their stories for a Western audience.
Knowledge at Wharton: How did Mr. Ambani build his wealth? The house on the front cover of the book is an incredible piece of architecture.
Crabtree: Yeah, it’s a remarkable thing. The spirit of an age is often defined in its most remarkable buildings. If you think about the American Gilded Age, then we think about the mansions of Fifth Avenue or the clifftops of Newport, Rhode Island, in the era of The Great Gatsby. This is what people see as the spirit of the moment.
In India, that is very much wrapped up in this building in downtown Mumbai called Antilia, which is a 70-story skyscraper. It is only 27 stories on the inside because they are all triple height. People call it the $1 billion home for Mr. Ambani and his family. It’s a very distinctive, unusual building. Even if you think about all of the other major cities of the world with all of their extremes of wealth — New York, San Francisco, Beijing, Sydney — there is no real building like this, and it tells you that there is something very remarkable going on in India.
Mr. Ambani actually inherited a chunk of his money, so his dad was the richest man in India before him. He is a second-generation entrepreneur, and they are often quite successful. He has taken the business that his father started and really expanded it very dramatically to the point now where, according to one of the rankings, he just overtook Jack Ma to become the richest man in Asia.
Knowledge at Wharton: How similar are these tycoons to the ones that we commonly refer to in the United States, like the Rockefellers?
Crabtree: I think they are quite similar. The figure I thought Mr. Ambani’s father was most similar to when I was reading up on the American Gilded Age was Cornelius Vanderbilt. Vanderbilt was one of the earlier of the tycoons. He was the richest man who had ever been, certainly in the modern era when he died in the 1880s, and had a very similar reputation to Dhirubhai Ambani, who was the father of Mukesh Ambani. They were outsiders, first-generation tycoons, and they weren’t looked upon very well by polite society at the time. But they created an extraordinary amount of wealth by disrupting the political systems that they operated in.
They were also users of that political system. They had friends in all of the right places, so they skirted that boundary between innovation and disruptive innovation on the one hand, and crony capitalism on the other. I think there are a lot of similarities between the giants of the U.S. tycoon era — the Carnegies and Vanderbilts, Jay Gould, J.P. Morgan and people like that — and the current crop of tycoons in India. Both for good and ill in a sense of their ambition, their ability to develop new business models, to pioneer new industries, but also often because of their ability to work the political system to gain an extra advantage. It is that second issue that I think India is now struggling with, as the U.S. did up until the era that followed that, what you call the Progressive Era.
“While the progress of the people at the bottom has been pretty good, the progress at the top has been spectacular.”
Knowledge at Wharton: The business side of President Trump, the Trump organization, has taken an interest in India and wants to play a significant role moving forward, correct?
Crabtree: It’s an interesting question. For the Trump organization, India is their largest foreign market measured by construction of towers. They have five buildings that are going up in India, which is more than any other country. Mr. Trump visited India on a number of occasions, and his eldest son, Donald Trump, Jr., goes back and forth. They have a number of partnerships, so the suspicion was that Trump was going to be a very pro-Indian president. He seemed to think that he understood India, he liked India, he had quite a lot of support from the Indian-American diaspora. He gave speeches during the campaign in parts of the U.S. that have a sizable Indian diaspora.
The thought was that he would be instinctively pro-Indian. It hasn’t quite worked out like that. His general trade war, although it is directed primarily at China, isn’t very popular in India because it is quite disruptive and destabilizing. There are a bunch of other things that he has been doing. He doesn’t much like the fact that Indian IT companies use what is called the H-1B visa system. He says this is abusive, and I have to agree with him on that, that there is a case in which some of the Indian IT companies are abusing that.
There is a range of reasons why Trump’s hardball approach hasn’t gone over terribly well with India. But it is true to say that Trump has business dealings in India. He has been there, he sort of knows how the system works, so many people think that means he sees India as a friend.
Knowledge at Wharton: You mentioned the Gilded Age in the United States being followed by a Progressive Era. Are there prospects for that path to be followed in India as well?
Crabtree: I think so. I think these things don’t happen by accident. They require deliberate progressive reforms. If you look at pictures of downtown Manhattan in the 1880s, they look remarkably similar to Mumbai today. You almost wouldn’t be able to tell the difference if they were side by side. You would look at America in that era and you would probably be quite depressed. You would see huge amounts of wealth being created by rather irresponsible looking business people. You would see very, very corrupt politicians. It was Mark Twain who coined the phrase the Gilded Age in the mid-1880s, when he wrote a novel that contained that in his title, and that was a satire on the incredible corruption of Congress and business elite.
Over the 20 or 30 years that followed, things improved for a variety of reasons, partly to do with an assertion of power by the middle class over politics, partly to do with urbanization, and partly to do with progressive political leaders who came in, combated corruption and broke up entrenched corporate power. I don’t see any reason why any of those things can’t happen in India. In a sense, India has an advantage that it is a late starter.
There are lots of other countries that have developed successfully, so it has to learn the lessons of those and develop its own model. It’s not going to be easy. I think it’s not going to be possible for India to mimic exactly the path that China took, or probably to achieve the sustained growth rates that China achieved during its 20- or 30-year rise. But I don’t see any reason why India in theory can’t do very well and be one, if not the fastest-growing economy in the world for the next 20 or 30 years. But in order to do that, its government needs to introduce a whole host of different reforms to manage that process.
Knowledge at Wharton: Will the gap between the haves and have-nots increase in the future?
Crabtree: I hope it doesn’t. I think India stands at a crossroads. If nothing is done, that really is the risk. If India continues for the next 10 or 15 years as it has for the last 10 or 15 years, we are going to find a country that has unprecedented levels of inequality. But if they build systems of social support for those at the bottom of the heap, then I think they should be able to move forward as other countries have done. I think there is good reason to be optimistic, and I think that is why a lot of companies are investing in India at the moment.
