Post-Hindenburg, “another kind of scrutiny will begin”

Good morning! In a departure from our deeply-reported stories and analyses, this week we have an in-depth interview with Ashutosh Varshney, Sol Goldman Professor of International Studies and the Social Sciences, and Director of the Saxena Center for Contemporary South Asia, Brown University. Varshney tells Dinesh Narayanan that the short-seller attack on the Adani Group is just the beginning. The interview has been lightly edited for clarity and brevity. We’ve also included a list of long reads for the weekend.

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Prof Varshney, you have written that the Hindenburg report and short-selling was the first disciplinary check on the Adani Group through international financial instruments and more should be expected. Could you elaborate on that? 

The distinction I was drawing was between international checks on productivity and business expansion and domestic checks. Domestic checks [on the Adani Group] have been missing. And because Adani moved into fundraising at the international level, the international checks came through financial instruments and capital markets rather than trade because he can sell virtually nothing on the world markets. Everything is contract-based, right? Power is contract-based, ports are contract-based. Grain storage, if he were to expand from India to somewhere else, will also be contract-based. These are not contracts with commercial entities but contracts with governments, including Haifa (port) in Israel. The power agreement with Bangladesh, power agreement with Sri Lanka, coal mines in Australia—these are all based on government permissions. Coal mines in Indonesia also have government involvement. So long as they were government-based transactions and contracts inside India, there were no checks possible on how much Delhi was promoting him [Adani Group founder Gautam Adani].

Since he was not selling anything on world markets, international trade was not a check either, as it was (a disciplinary check) on Korean chaebols. Mr Modi [Prime minister Narendra Modi] seems to have a national champions strategy much like South Korea. Not like China. China does not have a national champions strategy. China does not encourage private firms to grow beyond a point. Jack Ma [Alibaba founder] is living in Japan, and Alibaba's wings have been clipped.

What distinguishes the Indian national champions strategy under Mr Modi and the South Korean strategy is that Korea’s was international-trade oriented. Indian national champions are not. But because they ended up in international capital markets, the disciplinary checks came for them.

Indian companies operating internationally have already come under some amount of international scrutiny, especially after India began opening up. But regarding the government-business relationship, the nationalist argument is that Indian companies are competing with global giants; the country needs national champions and they need government support, perhaps even regulatory forbearance to some extent. And we have seen governments getting involved in international deals. For instance, Indian Prime Minister Narendra Modi, French President Emmanuel Macron, and US President Joe Biden getting involved in the Air India, Airbus, and Boeing deal. 

Today’s airline deals (are happening) in a post-pandemic world economy where job creation is a serious issue in the West also. Airline deals are likely to get heads of government or governments involved at this moment. Not always. It's a conjunctural issue, not an enduring policy issue.

France has to create more jobs. The United States has to create more jobs. And the deal with Boeing, because of its impact on employment in the United States, got Mr Biden involved. If Boeing had sold as many planes in 2012 or 2013 in India, it wouldn’t have had presidential involvement. This is entirely conjunctural.

How do you see the government-business relationship evolving from here, particularly in India? In no country is the government just a facilitating bystander, is it? 

That's the distinction I draw between advanced capitalism and early capitalism. In early capitalism, the government is involved in all kinds of ways in business development. It could be through a national champion strategy. It could simply be through all kinds of corrupt deals as in the United States after the civil war, or as in China. China’s case has been very well documented in China's Gilded Age, the book by Yuen Yuen Ang. A state-owned enterprise can in China be a national champion, but not a private firm.

And the Gilded Age of the United States of America had no national champions at that time. It's not that Washington was promoting either the Vanderbilts or Carnegies or Morgans. They were simply cutting all sorts of deals with all kinds of governments. Not only Washington; I cited the case of a railroad baron Jay Gould basically buying legislatures in Pennsylvania and some other states. Therefore, the best comparison is with South Korea, not with China. And not with late 19th-century America.

Korea’s clean-up began because of international trade.

India's clean-up is very likely to begin, too. It will take some time, but now the international scrutiny is very serious. If (Indian companies) want international funds, if they go to the international capital markets, there will be scrutiny. Capital market companies are not going to put in funds just because an industrialist is close to the government. Corporate governance and practices will be an issue.

Some companies seem to be coming to India or bringing in capital precisely for the reason that they (through their local partners, perhaps) will get government cover. A belief that their investment is protected. 

Yeah, some companies will benefit from that. Apple, I think, is such a huge symbolic move. For one of the most respected and successful companies of the last two decades to start producing the top-of-the-line iPhones in India is symbolically a very big gesture. And it is so important in corporate circles that it's quite possible that the government will also provide (Apple) benefits of some kind. What exactly those benefits would be, we don't know. But it is not clear that kind of protection will be available to all the companies that will come. Please note, the (number of) companies that are coming in and are likely to come in at this point is not huge.

China is increasingly an unattractive place. With US-China tensions rising and with Xi Jinping’s attitude towards the private sector, there is considerable dismay in corporate circles about Chinese possibilities. Whether the (capital) diversion will be towards Vietnam and Thailand, Indonesia, Malaysia, or India is to be seen. India has an excellent chance of getting the investments that are leaving China. Vietnam and Malaysia are small countries. Indonesia has a large market (worth) a trillion dollars. But India is over $3 trillion, perhaps close to $3.5 trillion now.

Companies that want to invest in Asia for exports might still prefer to go to Vietnam. But those who wish to concentrate on the domestic market as opposed to exports or want to combine the two, may find India much more attractive than Vietnam. Because of the $3.5 trillion market. That is huge.

iPhones are not going to be primarily consumed in India. iPhones are for the upper middle class, and iPhones are for exports. Given all this, international scrutiny will now be higher than ever before. International scrutiny indeed began with the opening up of the Indian economy, but there was nothing like Adani for a long time. Mr Ambani [Reliance Industries chairman Mukesh Ambani] is well known in capital market circles for a very, very long time. And Mr Ambani also did not go from $9 billion to $120 billion in 8-10 years. Anything like that invites international scrutiny right away.

So do you expect something like this to increase?

Hindenburg makes money out of short-selling, by betting against the expansion of companies and their stocks rising. That's perfectly legal. That's part of how the market works. They say they've been researching for two years. Even if they were not, the effect was huge. Adani’s personal fortune and the value of his companies have all been harmed.

Please note there is another kind of scrutiny that will begin now. The Wall Street Journal and the Financial Times might well unleash four or five reporters to investigate what is happening in Mauritius, where these shell companies really are, and who owns them— expect the next set of revelations on that. I don’t expect The Wall Street Journal to not have sent reporters to Mauritius or to the UAE to investigate which companies were investing in Adani and why the stock was going up. So that scrutiny is not only capital market scrutiny but also financial journalistic scrutiny, which will begin in a much more serious way.

Coming back to the point about national champions and government support to companies. How do you see the rise in protectionism, in terms of tariffs and trade barriers? Especially because of the intensifying nationalistic narrative. 

Here is, first, a philosophical response to that. I have never believed—or I believed for a little while and then quickly came to my senses— that Mr Modi is a trade-oriented or free market reformer. That’s not what he is. He is not your standard neoliberal reformer. Indeed—I made this claim at some conferences and have not yet written about it—I have never in my professional life met a single RSS person who understands how markets work. They knew something about small trade and small traders and wanted governments to not harass them (they were harassed by all kinds of inspectors). But that was not equal to support for markets. They always believed in their own industrialists as opposed to industrialists from anywhere else. If you believe in markets, you would not prefer an inefficient domestic producer over a far more efficient international producer. Mr Modi is not there either. He will not support a far more efficient international producer over an inefficient Indian producer. Unless there are some other gains.

For example, Apple’s decision to make iPhones in India—top of the line iPhones, not the older ones—is an interesting case for us to analyse and think about. Here, the issue is not the market per se, but the prestige it brings to India. That is the bigger driving force. In any case, iPhones are not going to displace Jio [of Reliance Industries]. iPhones are primarily going to be for exports. Or at least half of them. The so-called global Indian middle class can buy iPhones, but the Indian middle class cannot buy iPhones. So there is no particular threat that Apple poses to a domestic producer in any case. And it brings prestige and exports. So the iPhone is a win-win. But it is not the Modi government’s commitment to the market principle. So yes, tariffs have gone up a bit but those who will make in India will get the benefits. This is all very South Korean, minus South Korea’s reliance on international trade.

I think India’s growth will continue to be substantial, but international scrutiny will also be more meticulous: on how international capital is invested, how it is being raised, and it is not clear that India will suddenly start getting $150 billion a year in foreign direct investment.

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