Kanika Datta: Does it pay to spend less?

Would more Indians be better off if rich Indians were more austere? As the latest War on Wasteful Weddings suggests, the issue has come to acquire an enduring significance as middle class incomes and lifestyles scale new heights of opulence, the band of crorepatis expands by the year and lefty economists shake their heads disapprovingly at Gini coefficients that point to growing inequality.

Just four years ago, Prime Minister Manmohan Singh sent corporate promoters and chiefs into a tizzy when he suggested, in his trademark nuanced bureaucratese, that they “resist excessive remuneration” and “discourage conspicuous consumption” at a Confederation of Indian Industry (CII) meet. Two years later, Salman Khurshid, then corporate affairs minister, was more direct: he advised companies against paying their top executives “vulgar” salaries.

India Inc, ever alert to signals from Raisina Hill, read into this a sure bet that CEO salaries would be put under strict government-mandated limits as they were in the seventies and eighties. In the event, a week after Khurshid’s blunt advice, Singh soothingly told reporters that there were no such plans; the matter of austerity, he explained, had been raised “in a general way”. But the issue didn’t go away. In late 2010, with the economies in the throes of rising food inflation, a Parliamentary Standing Committee on the everlastingly delayed companies Bill recommended salary caps on CEOs beyond the existing links to net profits.

Singh’s CII statement was possibly his way of sending India Inc a gentle reminder that it is faintly distasteful to spend too well when many Indians struggle to earn a dollar a day. India Inc protests that its pay and perks are nowhere near western levels, an odd argument since our companies are still smaller than those in the West. Either way, the question of how much the fat cats reward themselves isn’t going away anytime soon.

Many influential leaders in government and Opposition are certainly old enough to remember the experience in the bad old days of socialism when a managing director’s salary was capped, first, to Rs 7,000 a month and then generously doubled after about a decade, before scrapping it.

So what did companies do? One, they compensated by giving CEOs a lifestyle that was often more luxurious than what many of their counterparts enjoy today — palatial mansions, armies of household staff and multiple cars, phone connections and expense accounts. Much of this was taxed, of course, but the government helpfully allowed accountants to be legally creative and minimise the burden. Two, other promoters, especially those with strong managerial proclivities, simply gave their CEOs designations that kept them outside the purview of the legal definition of CEO-ship and paid them lavishly. Forget about the gap between rich and poor, the gap between the rich and middle class was huge.

Did this cause widespread social unrest, a key reason for those exhorting austerity today? The Naxalite movement, with its origins in the hedonistic tea plantations of north Bengal, was conspicuous by its presence because it wasn’t really replicated country-wide. It is also worth noting that no big business establishment – the supposed Class Enemy – was attacked during the sixties movement nor was any big industrialist. Also, the middle class was probably way more discontented then. But it never took to the streets in protest if only because it saw little point in doing so. If it does so today, it is because it understands well how corruption in governance can impede its journey into the ranks of the rich.

The inequality that exercises some economists and thinkers now is not the result of more Indians growing poorer but because more Indians are getting richer. So yes, it would do CEOs and senior executives a power of good to curb the salaries and perks they pay themselves and follow the kind of unassuming philanthropy and austerity of, say, Narayana Murthy or Warren Buffett. But that’s a moral choice, not an efficient re-distributive mechanism as populist politicians will have it. It wouldn’t actually make the poor better off nor release a significant amount of wealth for their benefit.

Indeed, the poor don’t really care if the rich get richer — note that instead of revolutionary protests outside Mukesh Ambani’s extravagant new home, it’s become an sattraction for locals to showcase to tourists. They would care even less if they were given the same opportunities to rise; that’s the essential message emanating from the current Naxal movement in the jungles of the east and south.

It is uncertain, however, whether Singh is aware of the irony in the great CEO salary debate that he sparked off. India’s expanding New Rich class is the result of the economic liberalisation he set in motion. Equally, the existence of so many poor people (the percentage varies according to the ideological proclivities of the economist and politician) is a product of policy failures at a time when garibi hatao is back in an updated format.