1

THE RISE OF CAPITALISM UNDER MODI GOVERNMENT: A STUDY

Title of Subject:

Macroeconomics

Submitted by:

Shantam Pal

18147, BMS 2B

Faculty-in-charge:

Dr Sushmita

Shaheed Sukhdev College of Business Studies, University of Delhi

14th October, 2019.

 2

TABLE OF CONTENTS Page No.

1.0 Abstract 3

2.0 Introduction 4

2.1 Rise of Industrial Capitalism 4

2.2. Rise of Capitalism in India 6

3.0 Literature Review 9

4.0. Research Methodology 11

5.0. Analysis 12

5.1Torrent Pharmaceuticals Limited 12

5.2. Jindal Steel & Power Ltd 13

5.3. Hindustan Uniliver Limited 14

6.0 Conclusion 18

Bibliography
 3

1.0 ABSTRACT

This paper aims to study the impact of the current government on the economic set up of the
nation with emphasis on one such policy, GST (Goods & Service Tax). The analysis of 3 major
industries, namely, Pharmaceuticals, Manufacturing and Steel on various parameters such as
time and revenue generated post-GST reforms showed that GST has a positive relationship
with the profit generated and level of industrialization. The growth of such industries was aided
by the rationalization of new tax brackets and such policy aided the process of individual role
players in the industry set up, with greater flexibility between states and increased Foreign
Direct Investment (FDI), henceforth aiding the creation of a laissez -faire economy. The
positive relationship between liberal state policy and industrial growth clearly indicates the
creation of a liberal economy, such as the US.
 4

2.0 INTRODUCTION

Adam Smith, in Wealth of Nations, famously quoted that:

“It’s the invisible hand of the market, not the heavy hand of government, that provides us
with freedom, security and prosperity.”

This statement proved to the genesis of modern capitalism, as it focussed upon the role of
enlightened self -interest and specialization in the promoting the efficiency of capital
accumulation.

Ayn Rand defined it in terms of its socio-political relevance, stating that it’s a system based
on the recognition of individual rights, everything being privately owned and further declared
it as the ‘unknown ideal’.

Various efforts were made by thinkers such as Robert LeFevre, an American libertarian who
claimed capitalism as a system wherein the working class earns money and invests it in the
means of production. There has been an increased emphasis on the role of free markets as
well, stating that it promoted freedom and democracy.

Henceforth, there is an intricate relationship between liberalism and capitalism, which had
been brought forward by the political philosopher Robert Nozick, who in his book, The
Theory of Justice (1971), stated that there should be no redistribution of wealth at all as it
infringes an individual’s rights which is of foremost importance. According to him the State
has a very minimal role and ideally, encompasses all aspects of individualism. He completely
rejected the idea of collective being, as brought forth by various thinkers before him such as
John Rawls, and this led to the birth of a laissez faire economy.

2.1 Rise of Industrial Capitalism

The rise of industry is intricately linked with the rise of Capitalism, the most relevant
example being Europe and the United States of America.

In the USA, after the Civil War ended, there was a rise of westward movement and industries
were set up all throughout the nation, making it the largest economy of the world by 1898.
 5

There was a change in a number of factors in the economy, such as the nature of work,
organisational methods employed. They were as follows:

In 1865 In 1898
How People Worked At own pace At Company Pace
Where People Worked Mostly farms Mostly factories
Difference in Social Minimal Extremely high
Classes

The factors that contributed in Global Economic Changes were:

➢ Technological Advancements:

The late 18th century was the golden age of innovation, with over 1 million patents being
issued in this time period. There was discovery of mass production methods such as the
Bessemer process, and growth of business technology such as the telephone, typewriter and
electricity. Due to the spread of the industrial revolution, there was setting up of railroads
across the nation, which aided in transportation of goods throughout the nation.

➢ New business strategies

There was presence of new business strategies that took place, such as Advertising [ Coca-
Cola; Kellogg’s], and a now integrated system of shipping made it easier for customers to
connect with companies. This led to the growth of Management, which led to greater
efficiency.

➢ Business Consolidation and pro-growth government policies

Since the government employed a completely laissez faire or “hands off” approach and they
were no restrictions such as income tax, it was possible for a few individuals to gain control
over the whole economy, with the help of railroad subsidies now applicable. This led to
application of vertical integration for the first time by businessman Andrew Carnegie, which
meant control over very single segment of the supply chain, which completely deduced the
 6

role of middlemen. This led to all the power being consolidated within a single individual i.e.
Andrew Carnegie, and led to huge profits in his business.

2.2. Rise of Capitalism in India

Pandit Jawaharlal Nehru famously defined Capitalism in India in British Raj as follows:

“India was under an industrial capitalist regime but her economy was largely that of pre-
capitalist period minus many of the wealth-producing elements of that pre-capitalist economy.
She became a passive agent of modern industrial capitalism suffering all its ills and with hardly
any of its advantages.”

Henceforth, it can be adduced that the British rule did bring Capitalism to India, but none of its
benefits to its economy.

2.2.1 Pre -Liberalisation Reforms

Post-Independence, India was extremely de-industrialized by the British Raj, contributing only
3.8% to the World Economy in 1952, from 23.3% in 1700. In order to provide growth, it was
decided that substantial public sector with state interventions and regulations in order to protect
indigenous industries shall be set up. Henceforth, the public sector played a huge role in the
economy. The following reforms took place in the pre-liberalisation era:

➢ The Planning Commission was set up in 1950 to oversee the entire range of planning,
including resource allocation, implementation and appraisal of five-year plans, and these
plans were modelled after the USSR’s model.
 7

➢ License Raj: The second five-year Plan and the Industrial Policy Resolution 1956 ushered
in the way for the development of the public sector and the birth of License Raj. It aimed
at setting up of a socialist pattern of economy in the nation and categorized all industries
into three groups, such as: 1) Industries of basic and strategic importance under Public
Sector, 2) Industries that were to be incrementally state-owned and 3) Consumer Industries
were left to the private sector. However, private sector went through heavy licensing.

➢ Nationalization of Banks: Indira Gandhi nationalized 14 private banks on 20 July 1969.

India’s 1991 economic crisis, its worst ever, were long evident. The country, for the first
time, had to sell 20 tonnes of gold to investment bank UBS on 30 May that year to secure
a $240 million loan. It pledged gold three more times after that sale, shipping 46.8 million
tonnes of the yellow metal to secure $400 million in loans from Bank of England and Bank
of Japan. All this gold was repurchased by December that year.
The Narasimha Rao-led government with Manmohan Singh as finance minister took over
on 21 June 1991 and launched a raft of economic reforms, including the dismantling of the
licence Raj.

2.2.2 Liberalisation
There was disinvestment in public sector enterprises and downsizing the government, and
the devaluation of the rupee as well. The restrictions on various MNCs trying to set up
industry in India were removed, and foreign trade was heavily relaxed. These reforms were
also carried forward by the Atal Bihari Vajpayee government.

2.2.3 Post Liberalisation Era

Not many economic reforms took place under the UPA government (2004-14) with the
highlight being the setting up of MGNREGA (Mahatma Gandhi National Rural
Employment Guarantee Act, 2006, the increased stake from 5% to 20% state-run
companies through initial public offerings or secondary issues as no privitisation of PSUs
took place, and the acquisition of UK based company Corus by Tata Steel for 13.7 million
dollars.
 8

Under the NDA government led by the BJP (Bhartiya Janata Party), the following changes
took place:

➢ The Planning Commission, which was based on the Soviet Model of centralised welfare
schemes was replaced by the NITI Aayog (National Institution for Transforming India)
which performs the function of a think tank.

➢ The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced, which made it possible
for lenders to oust errant promoters from a company and hand it over to financially sound
owners.

➢ Demonetisation: All 500 and 1000 Rs notes ceased to be legal tender from the eve of
November 5, 2016 in order to curb black money and corruption. This affected various
industries heavily dependent on cash inflow, such as Real Estate and various small-scale
industries as well.

➢ GST (Goods & Service Tax), introduced on 1st July 2017, came into effect in order remove
tax barriers across states and create a single common market, ensuring a free flow of goods
without trucks being halted at borders for payment of interstate levies.

There has also been a shift towards Start-ups, with the Indian company Flipkart’s 77% stock
being valued at 21 billion dollars after being sold to the American company Walmart. There
has also been a gradual increase in the number of companies being valued over 1 billion dollars,
and with the privatisation of Air India, a huge role has been played towards liquidation of loss-
making PSUs.
 9

3.0LITERATURE REVIEW

1.) Sau, Ranjit. (1984) ‘Development of Capitalism in India’, Economic and Political
Weekly, Vol. 19, pp. 73-80.

This paper deals with the aspects of modernization in the ushering of capitalism in India.
It argues that in a country such as India at the present stage of development, merchant’s
profit acts as an obstacle, and that the path of transition to full- fledged is blocked from
both sides; above and below. Due to the internal structure in India, small capitalists find it
hard to move to higher levels while on the other hand, landlords and traditional capitalist
farmers haven’t been sufficiently stimulated to transform themselves into industrial
capitalists. While dealing with economic theory, this paper aided the researcher in
understanding the problems of the Indian economy in moving towards a capitalist
economy, bringing forth the various unique aspects of the economic structure of the
nation.

2.) Mazumdar, Surajit. (2011)’Continuity and Change in Indian Capitalism’, Munich

Personal RePEc Archive, Paper No. 38907. Available at: https://mpra.ub.uni-
muenchen.de/38907/ (Accessed: 3rd August 2019).

This paper studied the growth of capitalism in India post the liberalisation reforms of
1991. It analyses how the current growth of the economy cannot be studied without
taking pre and the post liberalisation policies into account and how development of pure
capitalism in India remains a distant dream. This paper helped the researcher formulate a
holistic opinion on the growth of the economy in a mixed economy nation with colonial
roots such as India.

3.) Smith, Adams. (1776) The Wealth of Nations. London. Penguin.

The book offered the researcher a collected description of what builds nations’ wealth
from the beginning of the Industrial Revolution, while touching on broad topics such as
the division of labour, productivity and free markets. This book provided an extremely
 10

vivid description of the origins of a free market economy and helped the researcher
understand the origins of capitalism.

4.) Salahuddin, A. (2018) ‘Robert Nozick’s Entitlement Theory of Justice, Libertarian Rights
and the Minimal State: A Critical Evaluation’, Journal of Civil & Legal Sciences, Vol.7
(1), p. 234.

Robert Nozick, a libertarian thinker of the 20th century propounded the theory of
‘individualism’ and completely rejected the idea of ‘collective interest’. He provided that
in order for a state to be present, it shall only be given a minimal role with absolutely no
contrast with an individual’s goals. His theories, which were in rival to that of John
Rawls, greatly developed a capitalism in the US, and set the foundation of a capitalist
liberal economy. This article greatly aided the researcher in understanding the political
philosophy behind the origin of capitalism in modern economy.
 11

4.0 RESEARCH METHODOLOGY

The research design for this study is Doctrinal. The nature of study is doctrinal legal
propositions by analyzing the existing statutory provisions, and available secondary sources
of data. In the present topic analysis of Rise of Capitalism under Modi Government, we
consider one of the major policy decisions take under its rule, I.e., implementation of the
Goods and Services Tax. For this the researcher had made an attempt to analyze the growth
in revenue during two periods, before and after the implementation of GST (from Q2 FY17-
Q2 FY19) in top companies of the industries most affected by GST.

The chosen companies are namely, Torrent Pharmaceuticals, Jindal Steel & Power Ltd. and
Hindustan Unilever Ltd. The data for this study was collected from official financial reports
of the respective companies. To explain various aspects and dimensions of the study, the
researcher has segregated the study into 3 parts, based on the different companies selected.
 12

5.0 ANALYSIS

Introduction
Goods and Services Tax
GST is an Indirect Tax which has supplanted numerous Indirect Taxes in India. The Goods
and Service Tax Act was passed in the Parliament on 29th March 2017. The Act happened on
first July 2017; Goods and Services Tax Law in India is an exhaustive, multi-organize, goal
put together expense that is exacted with respect to each esteem expansion.

5.1. Torrent Pharmaceuticals

Downpour Pharmaceuticals Ltd. is the leader organization of the Torrent Group. Situated in
the Indian city of Ahmedabad. It is dynamic in the restorative regions of Cardiovascular
(CV), focal sensory system (CNS), gastro-intestinal, diabetology, against infective and
torment the board sections. It has additionally forayed into the remedial sections of
nephrology and oncology while likewise fortifying its attention on gynecology and pediatric
fragments.
 13

ANALYSIS
As observed in the above graph, Torrent Pharmaceuticals had minimal growth, and even
negative change in revenue (Q1 FY18) before the introduction of GST. However, after its
introduction, Torrent Pharmaceuticals experienced a growth in profits, which is primarily due
to correction in drug inventory of stockists.

Post GST, Pharmaceutical industry's conventional expense and conveyance model will get
supplanted by production network efficiencies. The focal expense subsumed under GST and
interstate exchanges between two sellers will progress toward becoming assessment
nonpartisan. This will prompt diminishing in cost which can be added to edges.

GST will likewise have beneficial outcome on warehousing technique. There are a
considerable lot of the pharmaceutical organizations keeping up their distribution centers in
various states so as to stay away from Central Sales Tax (CST) of various states. Post GST,
producers can set their stockrooms at their key areas and union of distribution centers will
happen over the division.

5..2. Jindal Steel & Power Ltd.

Jindal Steel and Power Limited (JSPL) is an Indian steel and vitality organization situated in
New Delhi, India. JSPL is a piece of about US$18 billion expanded Jindal Group
combination. JSPL is a main player in steel, oil and gas, mining, power and framework in
India. The organization produces steel and power through in reverse reconciliation from its
own hostage coal and iron-metal mines.
 14

ANALYSIS
As observed in the above graph, Jindal Steel & Power Ltd. Experienced steady growth
followed by a negative growth in its revenue pre-GST. However, after GST’s introduction,
there has been a significant growth in the industry and the company, mainly due to 5%
reduction in tax rate of input materials like coal and iron ore.

Former tax laws on the Iron and Steel industry included 3 main taxes.

Excise Duty- 12.5%

Average VAT- 5%

CST-2%

Therefore, the net tax came out to be 19.5%, after the introduction of GST, it reduced to 18%
which came out as profitable for the industry as well as Jindal Steel & Power Ltd.

In conclusion, Iron and steel industry would at first have a greater expense because of
progress and increment in working capital prerequisite yet over the long haul will be gainful
in light of the normal decrease in coordination and lower charge on contributions under GST.

5. .3. Hindustan Unilever Limited

Hindustan Unilever Limited (HUL) is a British-Dutch assembling organization headquartered
in Mumbai, India. Its items incorporate nourishments, drinks, cleaning operators, individual
 15

consideration items, water purifiers and customer products. It is additionally one of the
greatest FMCG organizations in India.

ANALYSIS

As observed in the above graph, HUL did not experience a fixed pattern in terms of revenue
growth pre-GST, as it occurred losses as well as profits during its course of operation.
Although, post-GST performance of the company shows steady growth in its revenue. This is
primarily due to reduction in logistic expenses. Before the introduction of GST, the tax
expenses occurring for the FMCG companies was about 2-7%, after its introduction, the rate
has fallen to 1.5%.

The FMCG organizations set up stockrooms covering each state, drawing in stock exchanges
among them, which thus encourage selling of merchandise to merchants locally. For the most
part, distribution centers are set up in states where the successful tax assessment is low. With
GST, they can set up storerooms any place they need with no trouble.
 16

6.0 CONCLUSION

During the 5 years of Modi Government’s tenure, a lot of policies like Demonetization,
Increase in FDI, GST and several other policies have impacted the Indian economy in a
positive as well as negative manner.

GST resulted in an easier tax reform for the government and a high industrial growth in the
economy, indicated through the quantitative analysis held in the research. Increased FDI and
high industrial growth are direct indicators of a rise in capitalism throughout the Indian
Economy.

Privatization of PSU’s under Modi Government is also a direct indictor of the rise in
capitalism under the respected government.
 17

BIBLIOGRAPHY [Harvard Citation Format]

1.) Smith, Adams. (1776) The Wealth of Nations. London. Penguin

2.) Sau, Ranjit. (1984) ‘Development of Capitalism in India’, Economic and Political
Weekly, Vol. 19, pp. 73-80.

3.) Mazumdar, Surajit. (2011)’Continuity and Change in Indian Capitalism’, Munich

Personal RePEc Archive, Paper No. 38907[Online]. Available at: https://mpra.ub.uni-
muenchen.de/38907/ (Accessed: 3rd August 2019).

4.) Salahuddin, A. (2018) ‘Robert Nozick’s Entitlement Theory of Justice, Libertarian

Rights and the Minimal State: A Critical Evaluation’, Journal of Civil & Legal
Sciences, Vol.7 (1), p. 234

5.) Glory M Liu, Aeon. (2019) ‘How Adam Smith became the patron saint of capitalism’,
Scroll, June 18 [Online]. Available at: https://scroll.in/article/927197/how-adam-
smith-became-the-patron-saint-of-capitalism.

6.) Greenspan, Alan. (2018) Council on Foreign Relations [Online]. Available at:
https://www.cfr.org/event/lessons-future-history-capitalism-america.

7.) (2019) ‘A short history of Indian economy 1947-2019: Tryst with destiny & other
stories’, Livemint, 14 August [Online]. Available at:
https://www.livemint.com/news/india/a-short-history-of-indian-economy-1947-2019-
tryst-with-destiny-other-stories-1565801528109.html.

8.) Chakravarty, Manas. (2018) ‘Narendra Modi government’s report card: ‘A’ for a
more robust capitalism’, Livemint, 22 May [Online]. Available at:
https://www.livemint.com/Opinion/9dXAdm4kiXGzhiLzbq3lqM/Narendra-Modi-
governments-report-card-A-for-a-more-robus.html.
18