The Hindenburg-Adani Enterprises faceoff is a telling tale about the volatile relationship between private capital and the Indian state.

Over the past few decades, India’s growth trajectory and the relationship between the state and private capital has shared traits with Latin America of the 1980s and Russia of the 1990s. For one, an ad-hoc pro-business policy has allowed a few companies to monopolise asset ownership. Second, there has been rent-seeking behaviour – adding wealth without contributing to productivity – at the top with the support of the government while cutting down on competition and the entry of new firms across sectors.

The rise of Adani Group has helped shape that trajectory, which is worrisome. In addition to Adani Group, headed by tycoon Gautam Adani, a few family-controlled conglomerates dominate the business scene in an opaque manner, potentially undermining the resilience of India’s corporate governance system and the regulatory structure.

Adani Group’s woes began on January 25 when Hindenburg Research, a US firm that conducts “forensic financial research”, released a report accusing the Indian conglomerate of serious malfeasance. It claimed that Adani had illegally used offshore investment funds and accounting fraud to boost share prices and group earnings.

Hindenburg has a reputation for being an “activist short seller”. It borrows the securities of companies it believes are overvalued because of alleged wrongdoing, anticipating that the price will fall. It sells these borrowed securities, hoping to buy them back later at a lower price.

By the morning of January 27, Adani Group had lost $51 billion in market value. Over a week since the Hindenburg report was published, Adani Group’s losses continue to mount.

On February 2, the Adani Group cancelled a much-awaited fund-raising exercise that had closed the previous day, citing prevailing market conditions. It has now said it will return the money to investors.

State of private capital investment

Over the past decade, despite the continuous dip in domestic private investment across sectors in the country over the last decade, the Adani Group has soared like no other firm in India – and perhaps Asia. The five-year rise in Adani’s stock performance and asset ownership levels have trumped even Elon Musk’s Tesla and Jeff Bezos’s Amazon.

As a consequence, the Adani Group has been seen as the poster boy of India’s aggressive bullish run in the equity markets. This means that anything amiss with the company’s stock performance or macro-fundamentals is likely to affect both domestic and foreign business sentiment in India.

What does this unfolding situation say about the relationship between big private capital and the government in India?

Political economy questions

Political economist Atul Kohli, in his work on the politics of economic growth in India between 1980 and 2005, had a detailed insight on the dynamics of the political economy that shaped the growth trajectory during that period.

According to Kohli, India’s entry to the global economic landscape in the 1990s was a result of incremental, gradual reforms of the 1980s based on shifts in the relationship between state and private business.

One question was central to the pursuit of Kohli’s thesis: did India’s growth acceleration in the 1990s and 2000s result from the state’s embrace of pro-market policies or from a more complex but identifiable pattern of state intervention?

For many experts, the post-1991 period after the Narasimha Rao-led government’s economic liberalisation is viewed as part of the pro-market growth trajectory.

According to Kohli, the economic reforms of this period – undertaken more on the capital market side – allowed Indian markets to operate more flexibly in certain sectors (telecom, automobiles, aviation, information technology, construction, consumer goods, among them) with the aim of bringing in private investment opportunities.

From this period, India saw a strengthening of the “state-capital-private business” alliance, often at the cost of the social and economic protection to India’s deeply fragmented labour force.

The Adani-Narendra Modi alliance, based on a newly designed pro-business regulatory outlook emerging from the Bharatiya Janata Party’s rise to power at the national level, signals a similar dynamic.

The success of the “Gujarat growth model” that Modi effected as chief minister from 2001 to 2014 pivoted around the emergence of such linkages, driven by large infrastructure investment from companies like Adani Group. Ever since Modi was sworn in as prime minister in 2014, Adani Group’s national footprint has also grown significantly.

As historian Adam Tooze noted on January 28, “Driving national infrastructure development, Adani personifies the oligarchic linkages and rentier profits generated by a licensing system for infrastructure on which Modi’s growth model has heavily relied.” Tooze means that the Adani Group’s ability to accrue and concentrate power and generate sustained profits without substantially adding to overall productivity is anchored in Modi’s growth model, which emphasises big infrastructure spending.

The growth of Adani Group – investing in acquiring ports and airports, for instance – has been driven by a cycle of rising equity values and corporate debt, particularly post 2020.

“Some argue the concentration of economic power in family-run conglomerates is a way to fast-track India’s economic development, like the chaebol did for post-war South Korea,” The Financial Times had noted back in 2020. Chaebol are large, family-run business conglomerates in South Korea.

In the state-big business compact of “New India”, the extent to which conglomerates like Adani Group are exposed to banks and insurance companies financed or supported by the exchequer (or tax money) requires greater scrutiny.

State-owned banks have already lent twice as much to the Adani Group than private banks. Of these, the State Bank of India, the country’s largest financier, has given loans of as much as Rs 260 crore to companies in the Adani conglomerate, Bloomberg reported.

The Life Insurance Corporation of India, in a public clarification, said its total holdings in Adani shares and debt was Rs 30,127 crore while the market value stood at Rs 56,142 crore after the plunge in Adani stocks as of January 27.

However, a few days before Adani Group’s shares began plunging, their market value in the Life Insurance Corporation’s books was a little over Rs 80,000 crore, according to journalist MK Venu. In just four days, the Life Insurance Corporation saw a portfolio loss of about Rs 23,735 crore, Venu noted. That is a large sum of money to lose for a company that has thousands of crores of long-term savings of average Indians pledged with it.

For the deeply divided (and unequal) corporate governance structure in India, driven by an ever-increasing concentration of business power and wealth inequality, there is a worrying lesson in Adani’s acquisition of dominant corporate power across sectors in only a few years.

It also exposes the structural challenges of the relationship between state-capital and private business in India, where a few family-controlled conglomerates with connections to the ruling party dominate business in an opaque manner, reflecting a disregard for regulatory scrutiny or the pre-established rules of doing business.

Worse, their financial exposure to public institutions and lenders such as state-owned banks or insurance companies pose a significant threat to the economy and ordinary Indians.

Deepanshu Mohan is associate professor of economics and director, Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University.

Also read:

From 2014 to 2019: How the Adani Group’s footprint expanded across India

From 2014 to 2019: How the Adani Group funded its expansion