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Less than a month after he warned against the growth of "crony capitalism" in India, Prime Minister Manmohan Singh set the cat among the pigeons again by admonishing the captains of industry for their indifference towards society, their skyrocketing incomes and conspicuous consumption, and their unconcern about income inequalities, which can lead to "social unrest".
His address to the Confederation of Indian Industry (CII) annual meeting last year exhorted businessmen to support affirmative action for Dalits and Other Backward Classes (OBCs); this year's speech called for "inclusive growth". Such exhortations are strange because they acknowledge the failures of policies of which Manmohan Singh was (and remains) the architect. They border on the bizarre because instead of exhorting, Manmohan Singh can legislate measures to correct what he considers undesirable in India's growth pattern.
Why, one must ask, does Manmohan Singh not reflect on the causal links between his neo-liberal policy initiated in 1991, and widening class and regional disparities? Why does he express dismay and surprise at the consequences when the causes are so evident? After all, he confessed some years ago his discomfort over skyrocketing corporate salaries, on which he had himself removed the ceiling. One can only hope that he does not periodically make these critical speeches only to vent his frustration - and do nothing to remedy the root-causes.
At the CII, Manmohan Singh's "Ten-Point Social Charter" addressed a range of issues, such as "healthy respect for your workers" and their welfare; corporate social responsibility (which must go beyond "tax planning strategies"): employment of underprivileged strata, skill generation: avoidance of non-competitive behaviour, including cartel formation: and adopting environment-friendly technologies. The list even includes fighting corruption and promoting socially responsible advertising.
Naively overoptimistic
Most of the exhortations are unexceptional, but sound naively over-optimistic about Indian businessmen's ability to take an enlightened view of their role in society and voluntarily regulate their conduct along ethical lines. However, it is Manmohan ingh's critical references to corporate CEOs' remuneration and conspicuous consumption, and growing rich-poor disparities that have claimed the greatest attention, especially in the media. This is not because our industrial barons apprehend that the Prime Minister's intention in making his speech was to prepare the ground for imposing a ceiling on CEO salaries. Deputy Chairman of the Planning Commission Montek Singh Ahluwalia, no less, has assured Big Business that that is not the agenda.
The real reason why CEO remuneration is being debated is ideological: supporters of the status quo do not want, and will doggedly resist, any change in the trend towards enlarging the share of executive earnings in corporate incomes. They believe the best way of doing so is to declare that area out of bounds for legislatures and elected governments - as President Bush did in January, when he said: "Government should not decide the compensation for America's corporate executives."
The CEOs' outriders in the media have now taken up the cudgels - with even greater mercenary zeal than them. Some commentators have poured scorn over the idea of regulating CEO remuneration as fundamentally irrational: buying a Bentley does not create backwardness in Bihar. This involves caricaturing the proposition that there is a correlation between elitist growth patterns and backwardness. It also shows contempt for the idea that the rich have a special obligation to society.
Some writers have called Manmohan Singh's suggestion a negation of the most "democratic" aspect of "eco<147,1,7>nomic reform". Many editorials carry eloquent captions: "PM's homily is anti-prosperity", "Capping CEO salaries will shackle private enterprise", "Making the rich fearful isn't anti-poverty; We aren't saving less because the rich are buying toys", and "Pinching the wealth of the nation".
Some commentators arrogantly declare that the poor just "don't have the mind-space" to bother about how much the "haves" get. They claim that "conspicuous consumption" is Manmohan Singh's new-fangled obsession, which sits ill with his earlier concern about encouraging the "animal spirits" of entrepreneurs. The fundamental inspiration behind these comments is a crude form of libertarianism, a dubious doctrine of the Ayn Rand variety, which rejects the idea that individual behaviour should be regulated to harmonise conflicting social interests. According to libertarians, it is wrong in principle to limit the freedom of enterprise, it is absolute; the market is always democratic and must never be curbed.
Income Inequalities
Before dealing with the toxic effects of such thinking, it is useful to take a look at our income inequalities. India now has the fourth largest number of billionaires in the world (36, compared with Japan's 24). There are various estimates of India's Gini coefficient for incomes (0.32 to 0.48, the highest value being 1.0 for the most unequal society). But there is unanimity that it is rising rapidly. (For an interesting discussion, see Partially Awakened Giants: Uneven Growth in China and India by Shubham Chaudhuri and Martin Ravallion, World Bank Policy Research Working Paper 4069, November 2006)
According to Merrill Lynch-Capgemini India had 83,000 High Net Worth Individuals in 2005, each with wealth of $1 million (not counting immovable property). Their number rose by 14 per cent in 2003-2004 and by 19.3 per cent the following year. It now probably stands at 100,000. Their collective wealth probably exceeds 50 per cent of India's national income. The 36 billionaires alone account for one-third of our GDP.
There are no exhaustive reliable estimates of CEOs who earn salaries of $1 million (Rs.4 crores). But their number runs into the low hundreds at the very least. According to EMA Partners' K. Sudarshan, there are between 75 and 100 "million-dollar non-promoter CEOs" in India, spread across financial services, private equity, consulting, telecommunications and information technology.
It is not just the CEOs whose salary has crossed the Rs.1 crore barrier. In 2005-06, Bharti Airtel had no less than 13 employees drawing a crore or more annually. Other companies which have employees earning over Rs.1 crore include Larsen & Toubro (8), Hero Honda (5), ICICI Bank (5) and ITC (3). CEO salaries have been growing at 30 to 40 per cent a year.
Add to these the minimum of 194 individuals who hold employee stock options exceeding Rs.1 crore. Some have options worth over Rs.100 crore - Tech Mahindra's Vineet Nayyar (Rs.216 crores), L&T's A.M. Naik (Rs.165 crores) and Infosys' Mohandas Pai (Rs.134 crores). Some of them could soon graduate to billionaires.
Then, there are the promoter-directors, who can give themselves lavish bonuses and fees, besides huge dividends and salaries, not to speak of commissions. Thus, Sunil Bharti Mittal has a salary of Rs.12.68 crores, Pawan Kant Munjal (Hero Honda) gets Rs.15.22 crores, Rajiv Bajaj (Bajaj Auto) gets Rs.2.08 crores, Naveen Jindal (Jindal Steel) gets Rs.13.54 crores, Pankaj Patel (Cadila Healthcare) earns Rs.9.93 crores, Malvinder Mohan Singh (Ranbaxy) earns Rs.2.62 crores... .
Gross Disproportion
<15,0m,,1>It is known that many promoters try to recover their original investment even before the project comes online. Besides, they transfer funds through distribution and procurement agencies and under/over-invoicing of exports/imports. But let that pass. These astronomical incomes are an affront to the vast majority of our people who earn Rs.3,000 a month, or Rs.100 a day. There is a 500 to 1,000-fold difference between these high CEO salaries and the average worker's earnings.
This wholly unconscionable differential is more than twice as high as that in the US, which has grown from 42-to-1 in 1980, to 107-to-1 in 1990, and 411-to-1 in 2005. (These are based on well-documented annual reports called "Executive Excess", by the Institute of Policy Studies, Washington. These need to be replicated in India too.) The disproportion is gross and obscene. Management guru Peter Drucker believed that CEO-worker income differentials should not exceed 20-to-1. Even J.P. Morgan thought so.
It is futile to argue that high CEO salaries are correlated to company performance. More often than not, they are not. As Boston Consulting Group chairman Arun Maira argues: "There is no clear correlation between [CEO] salaries and [corporate] performance... . Even in the US, companies with the best-paid CEOs do not necessarily produce the best results. In fact, companies with lesser paid CEOs often perform much better."
Nor are high salaries obviously a consequence of shortage of "talent". Considering the huge recent increase in the number of MBA graduates produced in India, and the rapid turnover of middle-level executives, it is hard to believe there is a shortage. In any case, Arun Maira says, "real" corporate leaders "have options about how much they want to be paid, how they will spend their money, and what they will do with their lives." Though they should be paid reasonably, "it is often not more money" that they seek. What is reasonable is not necessarily the highest possible sum.
The truth is, India is embracing the same "shareholder-value" capitalist model that led to corporate loot by American CEOs and produced a series of scandals such as Enron three years ago. CEO irresponsibility and criminality is writ large on the "shareholder-value" model. We are blindly following it.
This brings us to some fundamental questions of ethics. First, even assuming that inequalities are inevitable in our stratified society, it is ludicrous to argue that they correspond to fair distribution. They cannot, by definition, simply because there is not even remotely any equality of opportunity in this society. Second, we must recognise the principle of proportionality, which is well recognised even in laws on war. In a society where hundreds of millions (and half our children) are malnourished, it is absurd to accept gross disproportions as natural, normal or tolerable, unless we want to bid goodbye to justice, equality and social cohesion, and to democracy itself.
Consequences
Third, we must be clear about the consequences of inequalities. Promoting unbridled consumerism by celebrating the "Greed Creed" can never encourage responsible conduct on behalf of the rich. It will inevitably aggravate profligacy and create a stampede for ostentatious consumption. A good example is India's "wedding market", estimated to have increased fivefold to Rs.50,000 crores in five years alone. The "emulation effect" among the aspiring classes can only increase their alienation from the majority. The Indian elite is mentally, psychologically and economically seceding from the people. This process will be further accelerated.
Fourth, precisely because most Indians do not believe that the rich are rich by virtue of merit or hard work - certainly not at the 500:1 or 1,000:1 level of income differentials - they resent the wealth of the few in contrast to their own poverty. In the absence of organised political movements, this will lead to crime and social disharmony, as in many Latin American countries. This will soon endanger society, including the rich. Growing crime and lawlessness are coming back to haunt our rich and powerful - high walls and barbed wire notwithstanding.
Finally, it is not good for democracy that the corporate elite should enjoy disproportionate power. This will corrupt democracy and thus undermine our greatest achievement. We must not forget that skyhigh CEO remuneration has not been the rule even in corporate America. Until they were lowered in the early 1980s, top-bracket federal income tax rates were 91 per cent (on incomes over $400,000) until 1964, and 70 per cent (on income over $200,000) until 1981. Even today, the super-rich in Scandinavia and Japan pay 80 per cent-plus in taxes.
Many of our libertarians scoff at the very idea of high tax rates on colossal incomes. We should pity them.
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