Vol – XLIX No. 24, June 14, 2014 | Amiya Kumar Bagchi

On 13 May 2014, just a few days before the election results were announced, the Congress-led United Progressive Alliance government – a government that was expected to lose its mandate – went ahead and approved foreign direct investment (FDI) in India’s pharmaceutical industry (BS 2014) by the US firm KKR (Kohlberg Kravis Roberts to recall its original name).

On the next day, five days before a new prime minister designate was elected, the Reserve Bank of India (RBI 2014) published the report of the Nayak Committee on the governance of banks in India, the main thrust of whose recommendations was the privatisation of public sector banks (PSBs). If the recommendations of the Nayak Committee are accepted – and there is every chance of this happening – it will seal the corporatisation of the Indian economy, a process which had commenced under the Narasimha Rao government, with Manmohan Singh as the finance minister. The style of corporatisation will also involve turning the economy inside out, in the sense that the control will vest in the grip of non-resident Indian (NRI) businessmen or non-Indian multinationals.

Pharma Industry

Let me first look at the background and implications of the decision to approve the FDI of KKR in the pharmaceutical industry. Until the replacement of the 1911 Patents Act by the Indian Patents Act of 1970 (which became effective in 1972), the Indian drugs and pharmaceuticals industry was entirely dominated by foreign monopoly companies (Chaudhuri 2005a). Essential drugs were not only very expensive because of their monopolistic pricing, they were also sometimes unavailable in the Indian market because there might be only one or two suppliers of those drugs.

The Indian Patents Act of 1970 abolished product patents. The life of a process patent was also brought down to seven years, with the provision of compulsory licensing in cases in which the supplier was unwilling to manufacture the particular product in India. India was not the only country to have adopted such policies. In many countries, including some which are now regarded as developed or industrialised, such as the economies of east Asia, many performance requirements were imposed on foreign manufacturing companies: they included the obligation to export a part of the output, limits on the equity share of foreigners, evidence of locally-based research and development, technology transfer, and employment and training of domestic workers. From 1972, Indian regulations covered most of these requirements for foreign firms in the pharmaceutical industry, barring the obligation to export or train Indians (Husain 2011). It is under that regulatory regime (the much-reviled licence-permit raj) that the Indian pharmaceutical industry prospered, reverse-engineering many products and obtaining value-added by utilising generic products, generally produced by public sector enterprises (Chaudhuri 2005a, Chapter 2; Husain 2011). Drugs also became cheaper and even the poor in India could access a large number of essential drugs.

In the 1990s, the Indian pharmaceutical companies became major exporters of drugs to developing countries, and increasingly became large exporters of drugs to developed countries, especially the US. In a series of cases, when the multinational companies refused to supply ant-retroviral drugs to South Africa, the Indian company Cipla offered to supply them at a fraction of the price charged by the multinational companies (Chaudhuri 2005a, Chapter 6; Cichocki 2009). Indian companies became big suppliers of generic and bulk drugs to developing countries, and they included medicines to fight HIV/AIDS.

India had joined the World Trade Organisation (WTO) at its inception in 1994, when the current president of India, the then commerce minister in the central government, had signed the Marrakesh agreement while Parliament remained quite ignorant of the provisions of the agreement. Under the terms of the WTO agreement, India had to introduce product patents for pharmaceutical products from 2005. It was predicted that the introduction of product patents would revert India’s patent regime to its colonial incarnation, and with a vengeance (Chaudhuri 2005a, 2005b). It would stymie the initiatives of the Indian companies to find new processes for old chemical entities, and the multinational corporations would try to protect old products by creating a chakrabyuha of minor patents to guard their monopoly.

It has been clearly established that the WTO, and especially, the TRIPs (Trade-Related Aspects of Intellectual Property Rights) provisions embodied in it, came into being as a result of a long-drawn-out campaign and conspiracy by some of the top multinational companies led by Pfizer, the largest drugs and pharmaceuticals corporation in the world (Drahos and Braithwaite 2003). By 2012, it was easy to predict that the situation of the Indian drugs and pharmaceuticals industry would revert to domination by multinational companies, as was true before 1972, but with some differences (Chaudhuri 2012; Gopakumar 2012). A summary sketch of the developments was given in Gopakumar (2012: 4):

First, unlike in the earlier period, the MNCs are aggressively pursuing growth in the generic segments. Second, they will enjoy monopoly power in the patented drugs market. Third, they have the financial capacity to take over more Indian companies.

Foreign Takeover

Between 2006 and 2010, the following companies were taken over by foreign multinationals: Orchid Chemicals, Shantha Biotech, Ranbaxy, Dabur Pharma and Matrix Laboratories. I am sure more sales and tie-ups allowing the upper hand to foreign companies in management of sales, manufacture and revenues must have taken place since then.

The KKR deal is highly significant, not just because it is an acquisition by a private equity fund, but also because KKR was one of the pioneers in leveraged buyout (LBO) of firms and was responsible for the LBO of RJR Nabisco, which remains the largest LBO in history in real terms (Burrough and Helyar 1990). KKR, along with other LBO experts, has also played a major role in creating huge private healthcare conglomerates in the US (Bagchi 2007), which have successfully blocked most of the healthcare-for-the-poor initiatives of President Barack Obama. It is interesting to note that even within the neo-liberal Congress ministry, there were misgivings about the KKR deal (BS 2014):

The commerce and health ministries were advocating a lower limit on investment in existing drug making units, along with various safeguards for acquisition of domestic critical care pharma companies by multinational firms. The ministry of finance and the Planning Commission have been favouring faster clearance, to keep investors interested.

The Government of India has managed to hand over India’s most successful manufacturing industry, until 2012, ranking third in the world in terms of sales and in the process that is much more expensive not only to patients in India but also across the developing world (for some indicative figures of essential drugs for fighting cancer, or cardiovascular diseases marketed by multinational companies, see Chaudhuri 2012, Table 7 and Gopakumar 2012: 2).

Nayak Committee Proposals

Let me now turn to the background of the report of the RBI’s Nayak Committee report on public sector banks (PSBs) and the likely consequences of the acceptance of its recommendations. There was some illusion among Indian politicians and publicists that India would be immune to the global economic crisis beginning with the bankruptcy of Lehman Brothers. But once the economic crisis hit India, businesses began to fail and default on bank loans and non-performing assets of banks piled up. But paradoxically enough, analysts of the Indian banking system became concerned, especially from 2012 about the burgeoning loans of Indian corporate houses from domestic, especially PSBs.

In August 2012, Credit Suisse research team (Gupta and Kumar 2012) showed that just 10 corporate houses, which did not include the Tata Group, Mukesh Ambani’s Group or DLF, were responsible for 13% of bank loans in India, and most of those loans were from PSBs. The 10 were the Adani, Essar, , GVK, Jaypee, JSW, Lanco, Reliance ADAG, and Vedanta groups. Bank loans to these groups had doubled between 2006-07 and 2011-12. By then these loans amounted to 98% of the net worth of Indian banks. The ratio of debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) of many the enterprises within the conglomerates were extremely high: for example, it was 27.2 for Adani Power, 15.5 for Essar steel, 18.7 for GMR Infra (consolidated), 18.2 for GVK Infra (consolidated), 15.7 for Lanco Infratech, 23.5 for Reliance Power, and 19.9 for Videocon Industries (consolidated). The interest cover in relation to earnings was pretty poor for many of the group enterprises, and the slowdown in the Indian economy was leading to a decline in the quality of assets. Some of the groups were not even Indian in any proper sense. For example, the Vedanta group was now headquartered in London, but it was availing loans from Indian banks to acquire mines and enterprises in India, Australia and other countries.

By the middle of 2013, the situation had not eased either for the economy or the PSBs, which were victims of unregulated private corporate deals. There were high-profile disasters, such as the bankrupt airline Kingfisher, or a plethora of stalled infrastructure and power projects (Crabtree 2013). Banks were trying to restructure troubled assets, but the money realised from restructuring was often only a fraction of the defaulted loans. Since the Government of India continued to follow a peculiarly contradictory policy of keeping the domestic interest rates high and allowing corporates to borrow from low-interest financial centres abroad, the foreign borrowings of corporates continued to rise, burdening India with debt-creating capital inflows. Given this inefficient incentive structure, some of the troubled companies are obtaining loans from abroad, with guarantees provided by Indian banks. For example, Lanco Infratech and ABG Shipyard too had their loans restructured in 2013, “but still face operational difficulties. ICICI Bank…provided a guarantee for an overseas fund raising of about $200 million by Lanco, a part of which will be used to repay the bank, said two people familiar with the matter” (Bhoir and Rangan 2014). This, however, only postpones the evil day, if the situation of the borrowers does not improve, and the Indian bank has to repay the loan.

The RBI has been preparing a Financial Stability Report every year and some of the key findings of its December 2013 report (RBI 2013, “Overview”) were:

• A rising trend in risk weighted assets (RWA) to total assets along with declining trend in coefficient of variation (CV) indicates that the rise in proportion of risky assets in the total assets of scheduled commercial banks (SCBs) is becoming more broad-based.

• The GNPAs (gross non-performing assets) ratio of SCBs as well as their restructured standard advances ratio have increased. Therefore, the total stressed advances ratio rose significantly to 10.2% of total advances as at end September 2013 from 9.2% of March 2013.

• The medium and large industries contributed more towards stressed advances than micro and small industries.

• Industries recorded the highest share in restructured standard advances and with relatively high GNPAs contributed the highest share of stressed advances in the banks’ loans portfolio followed by services.

• Five sectors, namely, infrastructure, iron and steel, textiles, aviation and mining together contribute 24% of total advances of SCBs, and account for around 53% of their total stressed advances.

The report gave a veiled warning about the continued prevalence of the mentality of too-big-to-fail among banks and stressed the macroeconomic factors and the contagion effects of weaknesses of enterprises within groups or across groups. Completely ignoring the fact that the distressed assets of the banks were caused primarily by two main factors, namely, the slowdown of the Indian economy, and the borrowing spree of corporate groups, the Nayak Committee condemned the PSBs for lacking the required sense of purpose, and recommended the privatisation of the PSBs.

At one stroke, the PSBs worth trillions of rupees, which had been built up with public money over the last 45 years, will be, if the Government of India and RBI act on the recommendations, handed over to the private corporate sector. This ignores the misgovernance of banks in private hands, not only before the nationalisation of the Imperial Bank of India and subsequently at 14 other major private banks but also the poor performance of private banks since the formal initiation of the neo-liberal order in 1991. To take a glaring instance, Manmohan Singh, when finance minister in the Narasimha Rao government, had inaugurated the Global Trust Bank (GTB), founded by Ramesh Gelli. When that bank went bankrupt as a result of evident misgovernance, the Oriental Bank of Commerce, a highly profitable PSB, was made to take it over – assuming the additional liability of GTB’s bad loans. One of the wonderful features of neo-liberalism is that the more it fails, the more it extracts from the victims of the system. This happened in Argentina, which became a basket case under a regime that had the blessings of all the Washington mandarins, and several presidents changed within a year until the left-leaning President Néstor Kirchner put his foot down and declared that Argentina would pay back its creditors only on its own terms.

Cost of Bailouts

The bailouts of private banks in all the developed countries have cost trillions of dollars of public money. I will here cite only an estimate for the cost to the British taxpayer until 2011:

Since 2007 the UK has committed to spending £1.162 trillion at various points on bailing out the banks. This figure has however fluctuated wildly during the period and by March 2011 it was £456.33 bn. That total outstanding support was equivalent to 31% of GDP in March (Curtis 2011).

To underscore the depoliticisation of basic decision-making in India, we cite the statement of Raghuram Rajan, the current governor of the RBI, made on 20 May, in which he endorsed the Nayak Committee statement about bank privatisation and proposed to ease the CRR (cash reserve ratio) and SLR (statutory liquidity ratio) norms in order to encourage bank lending for infrastructure projects (Mehra 2014), again ignoring the fact that infrastructure projects of the corporate sector were major contributors to the troubled assets of Indian banks. All this was happening when there was no ruling central government in India – one government had been defeated and the other had yet not come in.

The corporate sector has now secured undisputed control of the commanding heights of the Indian economy and has succeeded in installing a prime minister, of whom they had been vocal supporters (Varadarajan 2014).


Bagchi, A K (2007): “Governing the Market in Health Care: The Social and Political Requirements” in Di McIntyre and Gavin Mooney (ed.), The Economics of Health Equity (Cambridge: Cambridge University Press), pp 36-58.

Bhoir, Anita and M C Govardhana Rangan (2014): “Banks Burdened with Rising Bad Loans Turn Foreign Loan Guarantors”, TheEconomic Times, 14 April.

BS (2014): Cabinet Clears KKR’s Pharma FDI Proposal, Business Standard, 14 May.

Burrough, Bryan and John Helyar (1990): Barbarians at the Gate: The Fall of RJR Nabisco (London: Arrow Books).

Chaudhuri, Sudip (2005a): The WTO and India’s Pharmaceuticals Industry: Patent Protection, TRIPS, and Developing Countries (New Delhi: Oxford University Press).

– (2005b): “Indian Pharmaceutical Companies and Accessibility of Drugs under TRIPs” in Maureen Mackintosh and Meri Koivasulo (ed.), Commercialization of Health Care: Global and Local Dynamics and Policy Responses (New York: Palgrave Macmillan), pp 155-69.

– (2012): Multinationals and Monopolies: Pharmaceutical Industry in India after TRIPS, Economic & Political Weekly, XLVII(12), 46-54.

Cichocki, Mark (2009): “The Cost of HIV Medicines: Making HIV Medications More Affordable”, URL: http://aids.about.com/od/hivmedicationfactsheets/a/affordable.htm, accessed on 23 May 2014.

Crabtree, James (2013): “Bad Loans Cast Long Shadow over Indian Banks”, The Financial Times, 16 July.

Curtis, Polly (2011): “Reality Check: How Much Did the Banking Crisis Cost Taxpayers?”, The Guardian, 12 September (URL: http://www.theguardian.com/politics/reality-check-with-polly-curtis/2011…, accessed on 19 May 2014).

Drahos, P and J Braithwaite (2003): Information Feudalism: Who Owns the Knowledge Economy? (New Delhi: Oxford University Press).

Gopakumar, K M (2012): MNC Patent Monopoly and Takeover of Generics in India, TWN Briefing Paper 62, Third World Network, March (www.twnside.org.sg), accessed on 22 January 2014.

Gupta, Ashish and Prashant Kumar (2012): India Financial Sector, 2 August, Credit Suisse, Research Analysis, URL: https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=…, accessed on 13 May 2014.

Husain, Shahbaaz (2011): “Foreign Direct Investment in Indian Pharmaceutical Industry”, Project Report submitted to the Competition Commission of India, URL: http://cci.gov.in/images/media/ResearchReports/shahbaazInternreportdec20…, accessed on 16 May 2014.

Mehra, Puja (2014): “RBI May Ease Norms for Infrastructure Funding”, The Hindu, 21 May.

RBI (2013): Financial Stability Report-2013 (Mumbai: Reserve Bank of India).

– (2014): Report of the Committee to Review Boards of Governance of Banks in India (Mumbai: Reserve Bank of India), May.

Varadarajan, S (2014): “The Cult of Cronyism”, Seminar, April, http://svaradarajan.com/2014/ 03/27/the-cult-of-cronyism/, accessed on 25 April 2014.