It’s official, because the Prime Minister has said it!

Indian corporates have long been criticised for operating as merchants, first and entrepreneurs, much later. This argument was sidetracked as leftish and pinkish for a long time, and never taken seriously. That might soon change.

This week PM Modi upbraided some leading tycoons with these words: “Risk taking is in your DNA that is why you are businessmen and not a consultant drawing a salary.” Indian capitalists, in the main, don’t belong to the bloodline that can take risks, lose an empire, win it back again, or trump competition by innovation. This is why they tend to be superstitious, and godmen seeking. Why, they might even have a ‘vastu’ for positioning their wallets.

India, therefore, needs to put in disincentives for non-risk takers, and release ‘animal spirits’ into the wild. Till the 1980s Indian businesses were shielded from foreign competition, and they returned this favour by not introducing a single innovation above street-corner jugaad. Such a waste, especially when seen in the context of South Korea. Business chaebols (or families) there used a similar opening to take risks, innovate and introduce world class industries. In contrast, our entrepreneurs fear the traffic so much that they have to be hand held to cross the road.

Even after liberalisation came to India in the 1990s, this risk aversion among Indian capitalists stayed firm and remained protected by a friendly state. This can best be seen in the advocacy and implementation of the current Public Private Partnership (PPP) model. If PPPs look attractive to the naked eye it is because they artificially cut budgetary deficits by shifting the spend to another column. Come to think of it, Enron did something very similar before it went down.

This is how the deal works. In the PPP scheme of things, the public puts in most of the investments, inclusive of easing loans to private players. If these companies now fail to make profits, for whatever reason, such as a fall in pocketing user fees, the state helps out with a variety of instruments. It can provide Viability Gap Funding, or even a guaranteed annuity, not to mention extending the toll period to concessionaires. NHAI did just that and was reprimanded for it by CAG in 2014.

If traffic stress forces the government to build a supplementary road in the same area as the PPP project, the private party will have to be compensated accordingly. This trend is not just in roadways, but in practically every sector, including electricity and sanitation. It has been noticed that PPP turnkey projects cost 25% more as government overprices risks in order to over-compensate the private sector.

Therefore, if the Nehru model of self-reliance killed the animal spirit among capitalists, so has the PPP model, albeit in a more disguised fashion. Those most in favour of PPPs are international consultants; people who Modi said are “drawing a salary”. They are quick to put out risk free advice for a huge fee. All of this works out rather well in favour of crony capitalism. The private sector shakes off all risks, the government absorbs this load, and the consultancies make the most out of the bargain. This is why, be warned, when people say they are going to stand behind you, they nearly always carry a knife.

Following Modi C N R Rao, who chairs the PM’s Scientific Advisory Council, also issued a harsh broadside against Indian billionaires. For all their whining and wealth, he said, they have not bothered to fund a single world class university like Stanford. This failing should not be seen in isolation but in relation to the innovation and risk adverse quality of Indian corporates. Even our famed IT companies put just about 3% of their turnover into R&D, whereas in other middle income countries the figure is about 11%.

Nor, for that matter, have Indian business chambers put their skin in the game to establish world class vocational centres. Why should this be so? Simple: Barring a few, our capitalists do not want a first rate labour force, for if they were to get one, they would not know what to do with it. Look at the facts. Only 18% of those professionally skilled get regular jobs, and 60% of them in the low paying informal sector. What is more, 44% of those with computer training and 60% with textile skills are not employed in areas of their competence. No risk taking, no innovation, hence, no labour upskilling.

What we have instead is a plethora of Micro, Small and Medium Enterprises (MSMEs), the bulk of them unregistered. These units invest zero in enterprise, but make a killing by flogging a low wage work force. If MSMEs did well when the going was good (up to 2008-09), it was because their main edge in the international market was cheap labour; as much as 43% of our export earnings depended on this factor. Today Laos, Cambodia, Bangladesh and many African countries can easily offer cheaper labour which, like water, always seeks the lowest level.

If the state pulls out the plug, some entrepreneurs will surely sink. But those that survive will grow back their stripes. This is a hard decision, but oral DNA drops will never revive the animal spirit.