Why India's 'billionaires club' is flashing bad news

In recent years, the advent of a rush of Indian dollar-billionaires into the global ‘rich list’ has triggered a lot of chatter about the larger story of India’s economic rise. Indicatively, in 2000, no Indian figured on the list of the world’s top 100 billionaires; but by 2011, there were seven of them in that elite club. Only the US, Russia and Germany had more of their billionaires in that top 100 billionaires’ list than India.

But a closer look at the networth of Indian moneybags, the membership details of their exclusive billionaires’ club, and the manner in which they made it to the top of the heap may reveal a somewhat troublesome trend that bodes ill for the healthy capitalist aspiration for all men to get rich.

That’s what Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, says in a guest post on Ezra Klein’s blog, the substance of which is drawn from his most recent book Breakout Nations: In Pursuit of the Next Economic Miracles.

Sharma wades into data about uber-rich billionaires - in India and other economies- and points to the disquieting story behind the rosy headlines about India’s growing billionaire class and what it means for India’s aspiration to compete in the global economy.

For instance, he notes, this year, India has 48 dollar-billionaires, four of whom are in the global top 100 billionaires list. (That latter number has fallen from 2011 because of last year’s slump in Indian asset markets.)

Indicatively, the US has 424 billionaires (37 of whom are in the riches 100 club); Russia accounts for 96 (of whom 13 are in the uber-rich 100 list); and China has 95 billionaires (of whom 5 are in the top 100 list).

But what may seem like an explosion in the Indian billionaires ranks doesn’t exactly validate India’s position as a fast-growing economy that provides ample opportunities for people to create wealth through the rules of a market-based system, reasons Sharma.

“In the global media,” he writes, “India is still closely associated with its technology entrepreneurs, but lately these dynamic moguls are getting replaced on the billionaire list by a new group: provincial tycoons who have cut deals with state governments to corner the market in location-based industries like mining and real estate.”

In other words, it isn’t the dynamism of capitalist principles that is creating billionaires in India, but access to government patronage, which isn’t a healthy model of creating wealth.

Also, there isn’t much of a “churn” among the Indian billionaires’ club members’ list: of the top 10 Indian billionaires on the latest Forbes list have been on that roster since 2006, Sharma notes. In contrast, the 2006 list had only five names that had carried forward from the 2001 list. Sharma reasons that this too is an unhealthy sign for the economy - since it shows that the economic environment isn’t competitive enough to allow for the forces of “creative destruction” to get full play and for others to get a shot at entry into the big league.

Sharma also points to one other area of concern: that India is generating too many billionaires relative to the size of its economy, and this is leading to concentration of wealth in fewer hands, which in turn could lead to stagnation.

Indicatively, India’s 48 billionaires account for a collective networth of $195 billion, which is a little more than a tenth of India’s economy. And while that data point isn’t, for instance as bad as in Russia (where 96 billionaires account for a fifth of the economy), it’s flashing warning signals.

China, on the other hand, comes out rather better than most developing economies. It has 95 billionaires, but collectively they account for less than 3 percent of the country’s economy. The turnover among China’s top 10 billionaires is also high, and no billionaire goes on to become disproportionately rich in the way that billionaires in other developing economies do.

Sharma’s narrative is a fascinating illustration of the oligopoly that makes up India’s billionaires. Its findings show that the puffed-up pride that most Indians feel when they hear of Indian billionaires forcing themselves into the club of the global rich may be entirely misplaced. If anything, it gives cause for worry.

Read Sharma’s analysis here .