COMMENTARY

Sealing the Victory of the

Corporate Sector
Amiya Kumar Bagchi

Between the end of voting and

counting, the Congress-led
government took a major decision
to permit even more foreign
investment in the critical
pharmaceutical industry, and
during those same days a Reserve
Bank of India committee
recommended the handover of
public sector banks to the
private sector.

n 13 May 2014, just a few days

before the election results were
announced, the Congress-led
United Progressive Alliance government
a government that was expected to lose
its mandate went ahead and approved
foreign direct investment (FDI) in Indias
pharmaceutical industry (BS 2014) by
the US firm KKR (Kohlberg Kravis Roberts
to recall its original name).
On the next day, five days before a new
prime minister designate was elected, the
Reserve Bank of India (RBI 2014) published the report of the Nayak Committee
on the governance of banks in India, the
main thrust of whose recommendations
was the privatisation of public sector banks
(PSBs). If the recommendations of the
Nayak Committee are accepted and there
is every chance of this happening it will
seal the corporatisation of the Indian economy, a process which had commenced under the Narasimha Rao government, with
Manmohan Singh as the finance minister.
The style of corporatisation will also involve turning the economy inside out, in
the sense that the control will vest in the
grip of non-resident Indian (NRI) businessmen or non-Indian multinationals.
Pharma Industry

Amiya Kumar Bagchi (amiya.bagchi@gmail.

com) is Emeritus Professor at IDS Kolkata.

16

Let me first look at the background and

implications of the decision to approve the
FDI of KKR in the pharmaceutical industry. Until the replacement of the 1911
Patents Act by the Indian Patents Act of
1970 (which became effective in 1972), the
Indian drugs and pharmaceuticals industry
was entirely dominated by foreign monopoly companies (Chaudhuri 2005a). Essential drugs were not only very expensive because of their monopolistic pricing,
they were also sometimes unavailable in
the Indian market because there might be
only one or two suppliers of those drugs.
The Indian Patents Act of 1970 abolished
product patents. The life of a process
patent was also brought down to seven
June 14, 2014

years, with the provision of compulsory

licensing in cases in which the supplier
was unwilling to manufacture the particular product in India. India was not the
only country to have adopted such policies.
In many countries, including some which
are now regarded as developed or industrialised, such as the economies of east
Asia, many performance requirements
were imposed on foreign manufacturing
companies: they included the obligation
to export a part of the output, limits on the
equity share of foreigners, evidence of
locally-based research and development,
technology transfer, and employment and
training of domestic workers. From 1972,
Indian regulations covered most of these
requirements for foreign firms in the
pharmaceutical industry, barring the obligation to export or train Indians (Husain
2011). It is under that regulatory regime
(the much-reviled licence-permit raj) that
the Indian pharmaceutical industry
prospered, reverse-engineering many
products and obtaining value-added by
utilising generic products, generally
produced by public sector enterprises
(Chaudhuri 2005a, Chapter 2; Husain
2011). Drugs also became cheaper and
even the poor in India could access a
large number of essential drugs.
In the 1990s, the Indian pharmaceutical
companies became major exporters of
drugs to developing countries, and increasingly became large exporters of drugs to
developed countries, especially the US. In
a series of cases, when the multinational
companies refused to supply ant-retroviral
drugs to South Africa, the Indian company
Cipla offered to supply them at a fraction
of the price charged by the multinational
companies (Chaudhuri 2005a, Chapter 6;
Cichocki 2009). Indian companies became
big suppliers of generic and bulk drugs to
developing countries, and they included
medicines to fight HIV/AIDS.
India had joined the World Trade
Organisation (WTO) at its inception in
1994, when the current president of India,
the then commerce minister in the central
government, had signed the Marrakesh
agreement while Parliament remained
quite ignorant of the provisions of the
agreement. Under the terms of the WTO
agreement, India had to introduce product
patents for pharmaceutical products from
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2005. It was predicted that the introduction of product patents would revert Indias
patent regime to its colonial incarnation,
and with a vengeance (Chaudhuri 2005a,
2005b). It would stymie the initiatives of
the Indian companies to find new processes for old chemical entities, and the
multinational corporations would try
to protect old products by creating a
chakrabyuha of minor patents to guard
their monopoly.
It has been clearly established that the
WTO, and especially, the TRIPs (TradeRelated Aspects of Intellectual Property
Rights) provisions embodied in it, came
into being as a result of a long-drawn-out
campaign and conspiracy by some of the
top multinational companies led by Pfizer,
the largest drugs and pharmaceuticals
corporation in the world (Drahos and
Braithwaite 2003). By 2012, it was easy to
predict that the situation of the Indian drugs
and pharmaceuticals industry would revert
to domination by multinational companies,
as was true before 1972, but with some differences (Chaudhuri 2012; Gopakumar
2012). A summary sketch of the developments was given in Gopakumar (2012: 4):
First, unlike in the earlier period, the MNCs
are aggressively pursuing growth in the generic segments. Second, they will enjoy monopoly power in the patented drugs market.
Third, they have the financial capacity to
take over more Indian companies.

Foreign Takeover
Between 2006 and 2010, the following
companies were taken over by foreign
multinationals: Orchid Chemicals, Shantha
Biotech, Ranbaxy, Dabur Pharma and
Matrix Laboratories. I am sure more
sales and tie-ups allowing the upper hand
to foreign companies in management of
sales, manufacture and revenues must
have taken place since then.
The KKR deal is highly significant, not
just because it is an acquisition by a private
equity fund, but also because KKR was one
of the pioneers in leveraged buyout (LBO)
of firms and was responsible for the LBO
of RJR Nabisco, which remains the largest
LBO in history in real terms (Burrough
and Helyar 1990). KKR, along with other
LBO experts, has also played a major role
in creating huge private healthcare
conglomerates in the US (Bagchi 2007),
which have successfully blocked most of
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June 14, 2014

the healthcare-for-the-poor initiatives of

President Barack Obama. It is interesting
to note that even within the neo-liberal
Congress ministry, there were misgivings
about the KKR deal (BS 2014):
The commerce and health ministries were
advocating a lower limit on investment in existing drug making units, along with various
safeguards for acquisition of domestic critical care pharma companies by multinational
firms. The ministry of finance and the Planning Commission have been favouring faster
clearance, to keep investors interested.

The Government of India has managed

to hand over Indias most successful
manufacturing industry, until 2012, ranking third in the world in terms of sales
and in the process that is much more expensive not only to patients in India but
also across the developing world (for
some indicative figures of essential drugs
for fighting cancer, or cardiovascular
diseases marketed by multinational companies, see Chaudhuri 2012, Table 7 and
Gopakumar 2012: 2).
Nayak Committee Proposals
Let me now turn to the background of the
report of the RBIs Nayak Committee report
on public sector banks (PSBs) and the
likely consequences of the acceptance of
its recommendations. There was some illusion among Indian politicians and publicists that India would be immune to the
global economic crisis beginning with the
bankruptcy of Lehman Brothers. But once
the economic crisis hit India, businesses
began to fail and default on bank loans
and non-performing assets of banks piled
up. But paradoxically enough, analysts of
the Indian banking system became concerned, especially from 2012 about the
burgeoning loans of Indian corporate
houses from domestic, especially PSBs.
In August 2012, Credit Suisse research
team (Gupta and Kumar 2012) showed
that just 10 corporate houses, which did
not include the Tata Group, Mukesh
Ambanis Group or DLF, were responsible
for 13% of bank loans in India, and most
of those loans were from PSBs. The 10 were
the Adani, Essar, GMR, GVK, Jaypee, JSW,
Lanco, Reliance ADAG, and Vedanta groups.
Bank loans to these groups had doubled
between 2006-07 and 2011-12. By then
these loans amounted to 98% of the net
worth of Indian banks. The ratio of debt to

vol xlIX no 24

earnings before interest, taxes, depreciation and amortisation (EBITDA) of many

the enterprises within the conglomerates
were extremely high: for example, it was
27.2 for Adani Power, 15.5 for Essar steel,
18.7 for GMR Infra (consolidated), 18.2 for
GVK Infra (consolidated), 15.7 for Lanco
Infratech, 23.5 for Reliance Power, and
19.9 for Videocon Industries (consolidated). The interest cover in relation to
earnings was pretty poor for many of the
group enterprises, and the slowdown in
the Indian economy was leading to a decline in the quality of assets. Some of the
groups were not even Indian in any proper sense. For example, the Vedanta group
was now headquartered in London, but it
was availing loans from Indian banks to
acquire mines and enterprises in India,
Australia and other countries.
By the middle of 2013, the situation had
not eased either for the economy or the
PSBs, which were victims of unregulated
private corporate deals. There were highprofile disasters, such as the bankrupt
airline Kingfisher, or a plethora of stalled
infrastructure and power projects
(Crabtree 2013). Banks were trying to
restructure troubled assets, but the money
realised from restructuring was often only
a fraction of the defaulted loans. Since the
Government of India continued to follow
a peculiarly contradictory policy of keeping the domestic interest rates high and
allowing corporates to borrow from lowinterest financial centres abroad, the
foreign borrowings of corporates continued to rise, burdening India with debtcreating capital inflows. Given this inefficient incentive structure, some of the
troubled companies are obtaining loans
from abroad, with guarantees provided by
Indian banks. For example, Lanco Infratech and ABG Shipyard too had their loans
restructured in 2013, but still face operational difficulties. ICICI Bank...provided a
guarantee for an overseas fund raising of
about $200 million by Lanco, a part of
which will be used to repay the bank, said
two people familiar with the matter
(Bhoir and Rangan 2014). This, however,
only postpones the evil day, if the situation
of the borrowers does not improve, and
the Indian bank has to repay the loan.
The RBI has been preparing a Financial
Stability Report every year and some of
17

COMMENTARY

the key findings of its December 2013 report (RBI 2013, Overview) were:
A rising trend in risk weighted assets
(RWA) to total assets along with declining trend in coefficient of variation (CV)
indicates that the rise in proportion of
risky assets in the total assets of scheduled commercial banks (SCBs) is becoming more broad-based.
The GNPA s (gross non-performing
assets) ratio of SCBs as well as their restructured standard advances ratio have
increased. Therefore, the total stressed
advances ratio rose significantly to
10.2% of total advances as at end September 2013 from 9.2% of March 2013.
The medium and large industries contributed more towards stressed advances
than micro and small industries.
Industries recorded the highest share in
restructured standard advances and with
relatively high GNPA s contributed the
highest share of stressed advances in the
banks loans portfolio followed by services.
Five sectors, namely, infrastructure,
iron and steel, textiles, aviation and mining together contribute 24% of total advances of SCBs, and account for around
53% of their total stressed advances.
The report gave a veiled warning about
the continued prevalence of the mentality
of too-big-to-fail among banks and stressed
the macroeconomic factors and the contagion effects of weaknesses of enterprises
within groups or across groups. Completely
ignoring the fact that the distressed assets
of the banks were caused primarily by two
main factors, namely, the slowdown of the
Indian economy, and the borrowing spree
of corporate groups, the Nayak Committee
condemned the PSBs for lacking the required sense of purpose, and recommended
the privatisation of the PSBs.
At one stroke, the PSBs worth trillions
of rupees, which had been built up with
public money over the last 45 years, will
be, if the Government of India and RBI act
on the recommendations, handed over to
the private corporate sector. This ignores
the misgovernance of banks in private
hands, not only before the nationalisation
of the Imperial Bank of India and subsequently at 14 other major private banks
but also the poor performance of private
banks since the formal initiation of the
neo-liberal order in 1991. To take a glaring
18

instance, Manmohan Singh, when finance

minister in the Narasimha Rao government, had inaugurated the Global Trust
Bank (GTB), founded by Ramesh Gelli.
When that bank went bankrupt as a result
of evident misgovernance, the Oriental
Bank of Commerce, a highly profitable
PSB, was made to take it over assuming
the additional liability of GTBs bad loans.
One of the wonderful features of neoliberalism is that the more it fails, the
more it extracts from the victims of the
system. This happened in Argentina, which
became a basket case under a regime that
had the blessings of all the Washington
mandarins, and several presidents changed
within a year until the left-leaning President Nstor Kirchner put his foot down
and declared that Argentina would pay
back its creditors only on its own terms.
Cost of Bailouts
The bailouts of private banks in all the
developed countries have cost trillions
of dollars of public money. I will here
cite only an estimate for the cost to the
British taxpayer until 2011:
Since 2007 the UK has committed to spending 1.162 trillion at various points on bailing out the banks. This figure has however
fluctuated wildly during the period and by
March 2011 it was 456.33 bn. That total outstanding support was equivalent to 31% of
GDP in March (Curtis 2011).

To underscore the depoliticisation of

basic decision-making in India, we cite
the statement of Raghuram Rajan, the
current governor of the RBI, made on
20 May, in which he endorsed the Nayak
Committee statement about bank privatisation and proposed to ease the CRR
(cash reserve ratio) and SLR (statutory
liquidity ratio) norms in order to encourage bank lending for infrastructure
projects (Mehra 2014), again ignoring
the fact that infrastructure projects of
the corporate sector were major contributors to the troubled assets of Indian
banks. All this was happening when
there was no ruling central government
in India one government had been defeated and the other had yet not come in.
The corporate sector has now secured
undisputed control of the commanding
heights of the Indian economy and has
succeeded in installing a prime minister,
June 14, 2014

of whom they had been vocal supporters

(Varadarajan 2014).
References
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The Economics of Health Equity (Cambridge:
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Banks Burdened with Rising Bad Loans Turn
Foreign Loan Guarantors, The Economic Times,
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BS (2014): Cabinet Clears KKRs Pharma FDI
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Burrough, Bryan and John Helyar (1990): Barbarians
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(2005b): Indian Pharmaceutical Companies
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