The Culture of Business: A Study of the Finance Business in the Vijayawada Region of Andhra Pradesh

A Synopsis submitted to the University of Hyderabad

for the Award of the Degree of

Doctor of Philosophy

In

History

By

S.Ananth

Department of History

School of Social Sciences

University of Hyderabad

Hyderabad – 500 046

2007

DECLARATION

I hereby declare that the work presented in this thesis entitled ‘The Culture of

Business: A Study of the Finance Business in the Vijayawada Region of Andhra

Pradesh’ has been carried out by me under the supervision of Prof. Atlury Murali,

Department of History, University of Hyderabad. The thesis or a part thereof has

not been submitted for any other degree at this university or any other University.

Date: (S.Ananth)

Hyderabad

CERTIFICATE

Prof. Atlury Murali Department of History School of Social Sciences University of Hyderabad Hyderabad – 500 046 This is to certify that the thesis entitled ‘The Culture of Business: A Study of the Finance Business in the Vijayawada Region of Andhra Pradesh’ submitted by Mr. S.Ananth for the award of the Degree of Doctor of Philosophy in History, is a record of bonafide work carried out by him under my supervision and guidance. This dissertation has not been submitted either in part or in full to any other university or institution of learning for the award of any other degree.

(Prof. Atlury Murali) Supervisor,

Department of History, University of Hyderabad,

Hyderabad – 500 046.

Head, Dean, Department of History, School of Social Sciences, University of Hyderabad, University of Hyderabad, Hyderabad – 500 046. Hyderabad – 500 046.

The Culture of Business: A Study of the Finance Business in the Vijayawada Region of Andhra Pradesh

Dr.S.Ananth

This study on the culture of finance business looks at important issues that affect

contemporary non-metropolitan Indian society and economy in its day-to-day functioning. It is a study of the nature and dynamics of finance capital and its impact in one of the most prosperous regions of Andhra Pradesh – Vijayawada, which is often considered the finance capital of the state.

In the foregoing chapters, we have analysed the characteristics of finance capital

as it is produced, reproduced and circulates in the region. Detailing the debates surrounding historical origin of the agrarian surplus enables us to place the subsequent developments in proper perspective as well as to understand the phenomenon of financialisation and commoditisation. Our study has traced the historical origins as well as the cultural and sociological conditions under which finance capital and speculative behaviour flourished reinforcing each other.

Very often business practices are conditioned both by the economic conditions

and the cultural practices. Karl Polanyi has rightly observed, “man’s economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets”1. This could largely explain how the local culture often leads various businesses to react differently based on local conditions. A good starting point may be by asking a question: what motivates a reputed international finance company (GE Money) to establish its branch in a petrol station? This study unravels the intricacies of the consumption and production of finance business along with its day-to-day mechanics.

While this study may seem region specific, it is imperative to point out that a

number of businesses across the country are similarly founded on socio-cultural norms and practices By using a region specific analysis, our study attempts to understand the mechanics of the finance business as it operates at the ground level in the country. It goes beyond a simple empirical study of the provincial (or local) character of the finance business and financiers. It would not be far from the truth to claim that approximately 70% of contemporary Andhra Pradesh’s leading business groups have their origins in the region that has been the focus of this study. Therefore, a study of the business practices of the region also throws light on the practices of the dominant business groups of Andhra Pradesh as a whole.

The origin of the prosperity and the surplus deserves greater attention than has

received thus far. Our study disagrees with conventional theories that the surplus of the

1 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time, Beacon Press, Boston, 2001, p. 48.

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present is the consequence of the British construction of the anicut across the river Krishna. However, it would be erroneous to claim that the construction of the anicut had no impact. A combination of the British land revenue settlements and the anicut construction did have a substantial impact on the economic and social structure in the district. The economic growth in the district was definitely greater than the neighbouring districts, which did not have access to greater irrigation facilities. However, it would be equally erroneous to claim that the construction of the anicut and the canal system were solely responsible for the growth of the city and the region. The most obvious impact of the anicut is the increase in acreage under cultivation. However, a statistical analysis of the area under irrigation, along with land revenue, trade and other statistical data reveals that the boom experienced by the city and the region in general is largely a post independence phenomenon.

Our study, therefore, disagrees with conventional theories that lay primacy on the

building of the anicuts as the sole cause of the origin of the present day surpluses. The endogenous growth, along with trading in agricultural surplus has been cited as one of the important reasons for the growth of the region and one cannot narrow the origin of the surplus to merely to the availability of the agricultural surplus. We have argued, that the rise of the transport sector, rice-milling (and other agro-based industries) and commodity trade along with the phenomenal growth in education have largely been responsible for the economic development of the region. It has been argued that the governmental developmental strategy has paid off in the region, at least as far as the economic growth and business opportunities are concerned.

It is clearly discernible that there has been a gradual spread of the markets

(commodity as well as credit and financial) over the past one hundred years. Financial markets have increased in size as well as in qualitative and quantitative functionality, a process that we have termed ‘financialisation’. The last five decades have seen the birth of innovative financial products, all of which are aimed at diversifying and containing risk to the large institutional players. This growth of the larger, formal financial market space has led to changes in the nature and profile of financing. This is most clearly visible in the region that is the focus of this study. This study attempts to understand the operational dynamics of finance capital in the everyday lives of small towns, which are often referred to Tier II and Tier III cities in official terminology.

The obvious change in the finance business has been the metamorphosis of

lending that in the pre- and early colonial period was geared to extract the surplus product to one that aimed to take over land. By the first three decades of the twentieth century, lending was undertaken with the intention of gaining proprietary rights over the land that the borrower mortgaged. This changed only with the Great Depression and the subsequent collapse in the agricultural prices, lease rates as well as land prices, which in turn led to an increased cost of ownership of land and a crash in the return on investment on the land holdings. Since then, especially in the post-independence period, lenders have largely (though not completely) transformed themselves to a lending business that is more interested in collecting interest, a typical feature of finance capital. This is not to

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claim that there is no attempt to take over the proprietary rights of the property mortgaged in contemporary India.

At this juncture, it is important to understand the reasons for diversification from

agriculture to other businesses by the dominant business groups in the region. This diversification is most visible among the Kammas of the region, but not limited to them. All the observers (including Gail Omvedt and Carol Upadhya) have pointed out that the cause for diversification to be either solely or largely based on the economic motivation. One may read this as evidence that capital generated in agriculture in the pre-independence period was far in excess of the requirement in agriculture and hence the tendency to diversify? One aspect of the local region (that holds true even for the present) that has been overlooked is the fact that the impact of great depression effectively changed the thinking about investment among the Kamma community. The community’s predominant investments have been in the purchase of agricultural lands, providing education to members of the family and then in finance business (money lending), chit funds and urban real estate among other things. Each family attempts to diversify their income streams, as they often believe that their business is risky. They would like ‘regular source of income’ (meaning a risk free income) - more like rents. N. G. Ranga had pointed the phenomenon of a few enterprising Kammas in every village, who have ten or twenty acres of land and were anxious to start a business. It is this tendency that we analysed in detail.

An interesting aspect of the post 1970s development is the large-scale investment

in buying agricultural land by any successful professional or businessman. The usual pattern of investment by those with substantial surplus (especially among the Kammas) has been to first purchase a house or plot of land in urban area, then proceed to purchase agricultural land in the district and subsequently purchase further urban real estate in either Vijayawada, Hyderabad, (and occasionally in Bangalore or Chennai). The past decade has seen this pattern of investment among other communities in the region. In fact, this pattern of investment is still followed by the relatives of emigrants to USA or Europe in the region.

The statistical data we have used in the study clearly indicates that the growth and prosperity after independence was far greater than the prosperity after the building of the anicut. This growth is in both qualitative as well as quantitative terms. As already pointed out, this prosperity has largely been built on the financialisation of the economy. Among the factors, that led to the exponential growth after independence include governmental developmental programmes that were introduced after independence, the growth of banking, the growth of the transport sector, clearly indicates that the agricultural surplus and trade were predominantly responsible for the development of the region. Moreover, the view that the one sided movement of capital from agriculture to the urban regions does not satisfactorily explain the nature of economic development. Since the late nineteenth century, the movement of capital in the region has been two-way rather merely from the village to the town – a practice that continued till the late twentieth century, if not later. N G Ranga’s observation about Kamma landholders wanting to establish businesses, the combined activity of the rich peasant doubling as a moneylender –

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‘commission agent’ in trading agricultural surplus all indicate a two way movement of capital. The substantial shift in the economic (and social dynamics) in the region may said to have occurred in the 1960s and 1970s largely because there was a shift of emphasis to financial services and transport business over agriculture. Since then land ownership has become an insurance, asset diversification and socially desirable feature that creates an aura of ‘dependability’ or classification as a reliable person for undertaking business due to their assets rather than their mainstay economic activity. A good example that may be cited is the common classification of a person with good quality wet agricultural land as a ‘safe’ borrower.

Thus, it may be pointed out, that a confluence of factors discussed above played a crucial role in the generation of surplus in the region. The impact of these factors would be felt in the first three decades after India’s independence when other factors such as increase in process, abolition of Zamindari system and other developmental works undertaken by the government combined with the entrepreneurial spirit of the dominant caste group (the Kammas) led to the economic and political rise of Vijayawada. In fact, the growth of the region is intricately linked not only to the growth of the Vijayawada city, but also the rise of the Kammas as a dominant community in the economic and political sphere of Andhra Pradesh.

We have exhaustively analysed the culture of lending, the nature of capital and lending during the colonial period to gain insights into the movement of capital, and patterns of investment in the region. Statements by contemporary observers like N.G.Ranga and W.R.S. Sathyanathan clearly indicate that lending was largely within the lenders’ immediate social circle and that diversification was essentially a feature of the post-depression period. The economic and social developments have been traced in the study and it has been pointed out that there was a two-way movement of capital from the villages to the urban regions (especially Vijayawada) and vice versa since the colonial times. The movement of capital from the urban centre (Vijayawada) to the countryside has become a marked feature of the post-colonial period, when investment in land is considered an essential part of the dominant social and economic communities’ diversification process. Thus, we have agricultural surplus that moves into a number of economic activities in the urban areas of the region, especially Vijayawada. At the same time, it is common for successful businessmen to invest a substantial portion of their profits in agriculture.

The centrality of the social networks, their functioning at different levels, and

their impact on different social and economic groups, along with their impact on the economics of lending occupies a place of pride in this study. The production and reproduction of these social networks under changing conditions have been exhaustively dealt with in this study. It is pertinent to note that local social networks have a substantial impact on circulation of capital and often, economic practices are conditioned by cultural practices.

Despite its unconventional character, the finance businesses that we have studied,

including lending and the stock exchanges, have great relevance for understanding the

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larger economic picture at the state as well as national level. The stock exchanges and the finance companies have been in the forefront of creating and broadening the channels and networks for the movement of capital. Through these networks, local surplus is integrated into the national and even international finance capital networks. By paying attention to finance business of the Vijayawada region, it becomes possible to understand the complex processes by which locally generated surplus acquires the apparently uncanny ability to anticipate and fund future booms that require huge capital. It is this ability of finance businesses which in the longer term laid the ground for the subsequent entry of institutional players, both Indian and international. With the entry of the national and international institutions, we have pointed out, the local players move out, diversifying yet again, to other business to create new markets.

It is therefore incorrect to assume that there is at all times a contest between

smaller finance businesses and corporate entities. We have shown that small businesses with a highly localised origin and sphere of operation have proved to be agile and simply moved on rather than attempt to challenge institutions whose economies of scale they cannot match. This early entry and exit into a business has been the hallmark of businesses in the region. It is pertinent to note, that there have been instances, when local players exited even before the government put in place regulatory mechanism related to some of these businesses.

The examples of innovative businesses that have been the focus of our study

(apart from the stock exchanges) include the cable business as established by Master Channel (that was later bought over by Zee Telefilms Limited and renamed as Siti Cable), financing infrastructure in the newly created Chattisgarh state, financing bids (tenders) for contractors and aqua related businesses among others. It is imperative to emphasise that business innovation is often a by-product of limited business opportunities that are available and the tendency to work around the existing legal systems. Innovative enterprises that have graduated to viable business corporate institutions abound in the region. The most recent example of a local business that gone on to get listed on the Bombay Stock Exchange is MIC Electronics Limited. The IPO was completed in April 2007 and the company is the first listed company of its kind in the business of Light Emitting Diode display boards (commonly known as LED boards). The larger point is the manner in which business innovation happens outside metropolitan centres but also beyond the formal bureaucratic and legal apparatus of the state and then willingly integrates into the more established and legally valid institutional framework.

Indigenous systems in the past and the informal systems of the contemporary

period have always been marked by a level of sophistication that never ceases to baffle observers. Locally prevalent ‘systems’ (which are in fact informal practices) vary from area to area and swiftly change according to the needs of their customers. Lenders, to this day have the ability and resources to arrange lakhs of rupees loans and transfer the money to different parts of the world using their own networks – something that the formal banking system is not yet able to do. This study has pointed out that, this agility and nimbleness is a historical product. The level of sophistication and business acumen can be gauged from the fact that some financiers were able to exploit the steep fall in the

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interest rates in the U.S.A to raise low cost funds, using their social networks. These low cost funds are then deployed in businesses and investments in the Vijayawada region to increase their profitability. Further, ample evidence of the agility and sophistication of the businessmen of the region becomes apparent when we note that the city’s elite was purchasing luxury homes (which also provided a rent) in far away Ooty, a popular hill station in Tamil Nadu, way back in 2001.

Our study has brought out in detail, the dichotomous but important relationship

between legality and legitimacy. The study analysed the importance of these issues in the context of everyday business practices in the Vijayawada region. Of late there has been some discussion on the distinction between the two. The relationship, or rather the gap between these two, draws attention to interesting areas of social and economic life where there is a seemingly blatant violation of laws that is widely known but goes without retributive action from the apparatuses. The obvious question that it raises is that of conditions in which a society tolerates or even encourages the violation of law. This study has drawn attention to instance when it is not the helplessness of the public to challenge a violation of the law or bring it to the notice of authorities but its active connivance that has ensured the perpetuation of illegal actions. The concept of ‘harmless fraud’ has been used to try and understand how the relationship between legality and legitimacy is worked out locally. The relationship between illegality and social acceptability that exists in the region is studied in the context of mass participation in the unofficial stock exchanges, pyramid schemes and certain other kinds of finance business.

Conceptualising the term ‘harmless fraud’ to try and understand the dichotomy

between legality and social acceptability has been a challenge for this study, especially in the realm of business. As such the notion of ‘harmless fraud’ is illustrative of the socio-cultural foundations of business practices. Drawing on popular usage of the term, we have used ‘harmless fraud’ to understand a number of every day economic activities. ‘Harmless fraud’ signifies a minor and inconsequential transgression of the law. Though not legal, activities that are classifiable as harmless frauds are broadly acceptable to society. Often individuals, believe that the completion of a business transaction to the satisfaction of both the parties, like exchange of goods and services for money and vice versa is sufficient proof of their integrity irrespective of the tenets of the law of the land. In case these business transactions are not in consonance with the law but acceptable to both the parties, then it is believed that there is no case for intervention by the institutions of the State. Any violations of laws under such conditions are not only considered to be minor transgressions of laws, but only measures aimed at overcoming stumbling blocks to the conduct of business. Such business practices often fall in the liminal zone between speculation and entrepreneurship where the law is kept in suspended animation. Often both sides involved are aware of the state of affairs.

Thus, in its most generalised form, the concept of ‘harmless fraud’ (as perceived

in the region and as used in this study) may be said to consist of a set of practices that are perceived to cause little or minimal harm to individuals and therefore justify the bypassing rigid/oppressive/restrictive laws. One manifestation of the harmless fraud is in fact, quite harmful and allows us to understand the increasing instances of economic

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fraud that affect larger sections of the urban middle class than ever before. We, however, need to recognise that the middle class is both victim and perpetrator of economic crimes because the fraudster too is a member of the middle class. Further, we have drawn attention to instances of the so-called victim being fully aware of the illegality of the business. The unrecognised stock exchanges of Vijayawada and get-rich-quick pyramid schemes are best examples of harmless fraud. This willing participation in fraudulent business is a point to be noted.

The concept of harmless fraud enables us to understand the role and complex

inter-relationships that exist between different players, including businesses, state and members of the community. The elastic conception of legality, legitimacy of illegal businesses and social acceptability of such businessmen means that it becomes more difficult for the state to intervene as all sections (like police, politicians, bureaucrats, etc) are fully aware of what is happening but are unable or unwilling to act. The history of the unofficial, unrecognised stock exchanges of Vijayawada clearly shows that institutions of the state were clearly aware of its illegality but refused to act - at least until a court case was filed by a person who felt he was cheated. Notably, the person filing the court case was an ‘insider’ who knew all along the illegality of the stock exchange. Our study argues that, regulation becomes a difficult task if we are to take a mechanistic of law. We stress the need to look beyond a mechanistic view of law and underscore the need to take cognisance of generally acceptable social norms. The evidence offered by the unrecognised stock exchanges of Vijayawada proves the need for a change in emphasis.

A further point about harmless fraud is that it is often intimately linked to

speculation. In the unofficial stock exchanges as well as pyramid schemes, especially the latter, participants are aware of that it is in the logic of the business to fail. Stock markets are known to crash, pyramid schemes can only collapse under their weight. Nevertheless, intelligent members of the middle class, who have at times received formal training in law or commerce or banking, participate enthusiastically in activities, which are illegal and wildly speculative. We have suggested that this is but one sign of the nature of finance capital but is also context specific insofar as it highlights the huge premium in this region on ensuring the mobility of capital. Money, according the folk wisdom in business circles, has to circulate or it becomes unproductive. There is an idiomatic expression in Telugu about money which captures this notion: ‘inapa pettelo moolugutondi’ (it is moaning in the safe) - as if money locked up experiences pain!

Speculation is often viewed in simplistic binaries, either necessary or bad.

Speculative financial activity in the region is both a weakness and strength of the region. The fact that speculative activity abounds in the region means that innovative business idea will always find a source of capital. The importance of the speculative activity that thrives in the region is strengthened by the socio-cultural networks and norms. The role of trust has been highlighted in our study.

The nuances of speculation in the region are best understood when we look at the finance business to be an ‘idle business’ (as one successful financier put it), meaning that they have a lot of ‘free time’ or ‘spare time’ at their disposal. This combined with the surplus, that is produced from a variety of sources such as agriculture, trade and services

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related economic activity provides them with ample opportunities to speculate. Our study has pointed out that N.G. Ranga’s observation that the lack of avocation was a cause for this speculative fervour and this speculative activity needs to be looked at in this perspective. A financier’s hours of work are flexible and often can be adjusted according to their convenience. This ‘free time’ is often spent on unproductive activities like banter, gambling or simply ‘wasted’ (as another financier put it). The more enterprising financiers use their ‘free time’ on a working day to pursue other speculative activities such as trading in stocks, commodities, speculating in real estate or participate in pyramid schemes. Interestingly, nearly all the financiers in the region have interests that are either spread out over one or more sectors like real estate, agricultural gardens, aquaculture, stocks or commodities.

Speculation has its own allure in the region. The fact that the contemporary elite

in the city have risen to their present status as grandee bourgeoisie from first generation entrepreneurs with humble economic origins, means that the common perception that quick money is not only possible but also easy, provided people put in the right kind of effort. This is reinforced by the fact that the stock exchanges, pyramid schemes and various other speculative enterprises have created their share of a tiny category of successful speculators. While the positive impact of speculation is the ability to raise capital for new hitherto untested business ventures, the negative repercussions of the speculative mass mentality is clearly discernible in pyramids schemes and innovative frauds that are found in abundance in the region.

Capital of all variants and irrespective of its geographic origin (local, national or

international) requires a value system and arbitration mechanism that provides satisfactory results with minimal cost and minimal damage to business. In case such systems or processes do not exist, they would be invented by capital. It is in this context that the institution of peddamanushulu has been conceptualised and analysed. The institution of peddamanushulu, as the informal arbitration system is referred to in the region, enables the contending parties to meet in an informal environment, discuss and often resolve their disputes without any adverse publicity that might be detrimental to their long-term business interests. Further, publicity might prove to be lethal for illegal businesses by drawing the attention of agencies of the state. The institution of peddamanushulu thrives on its ability to draw upon various cultural and social practices and idioms that are a part of the lived experience of people. While there are no steadfast rules under which the peddamanushulu operate, the elastic nature of the institution enables it to survive, thrive and operate under most circumstances. The institution’s ability to solve problems transcending caste and class is a unique aspect of the business culture. We have argued that the peddamanishi is not necessarily a member of a traditional elite (caste elder or zamindar, for example) but often a respectable member of the business community who rose from rather humble origins. The peddamanishi is an important sign of how modern institutions fabricate lineage and invent traditions although they are in fact products of a specific time and place.

We argue that, any company or business that hopes to operate profitably in the

region but does not provide any mechanism for peddamanushulu to arbitrate is bound to

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be trapped in a myriad of legal problems. An excellent example of the debilitating consequence of the lack of informal arbitration mechanisms is the micro-finance business. The micro-finance business, as it operates, has no space for arbitration in case of dispute or inability of a borrower to pay the lender. In the Vijayawada region, this has led to coercive attempts to collect the dues and a public outcry and against such coercion. This public outcry, has forced state intervention leading to a complete halt in the micro-finance business in the region. Micro-finance Institutions (or MFIs) have been forced to abandon their business and look at other regions and states to expand their business. In contrast, due to the existence of various mechanisms to settle disputes informally, the finance companies, especially of the local genre, have continued their business – mostly unhindered. The case of Kotak Mahindra, as well as other examples shows that irrespective of the economic influence, legal grounding of the company or their ‘systems’, participants are expected to conform to teerpu of the peddamanushulu.

We, therefore conclude, that the study of this region and its business practices is

indeed rewarding and offers many insights into the social-cultural foundations of economic activities. At a time when the nation’s economy is being more and more closely integrated with the ebbs and flows of global finance capital, the study of the provincial capital provides vital clues on the manner in which locally generated capital finds its way to the state, national and international institutions and flows. A study like this also alerts us to points of resistance—not political, but economic as well as socio-cultural—to the rampant spread of globalised finance capitalism. It is not in the form of political movements alone that arrest the growth of mega corporations, both national and multinational, but also entrenched forms of local capitalism and its customs and folklore.