Once Again a Ponzi Lays Waste

EPW, Vol - XLVIII No. 19, May 11, 2013

Editorials

A toxic cocktail of power, politics and rampant finance underlies Saradha's growth and collapse.

The implosion of West Bengal’s Saradha Group – real estate company, chit fund enterprise or a straightforward Ponzi operation, Saradha defies definition – has led to the familiar blame game. Was it the state government (the present or the previous one?) which turned a blind eye to Saradha’s dizzying growth built on sand? Were the Reserve Bank of India and the Securities and Exchange Board of India guilty of ignoring the flashing signals? Are the regulations of the financial sector perennially behind market avarice? Each time a highly “successful” finance company collapses, the questions posed are the same. Only for the concerns to gradually subside before the next collapse occurs. But the next time is never different.

The financialisation of household savings in India can be traced back to the late 1970s with a shift in the policy preference of the state. Indira Gandhi, in her address to the Federation of Indian Chambers of Commerce and Industry on 25 April 1975 wondered “if industrialists, even those who command the confidence of the investing public, have done all that they can to tap private savings”. This call to tap private savings of the investing public uncannily coincided with the rise of new enterprises that then became the stuff of business lore in the 1980s. Many business groups tapped into private household savings using money circulation schemes and some of these went bust, the most infamous being Sanchayita Investments in the early 1980s. The same period saw a proliferation of chit fund schemes, many of which too collapsed. These became national issues leading to the banning of money circulation schemes in 1978 and the promulgation of the Chit Fund Act in 1982.

A market in primary equities was promoted in the “zone of non-intervention” by the state along with deposit mobilisation. The nationalisation of banks in 1969 set limits on the accumulating possibilities for big players in finance. But with the dilution of equity by companies covered by the then Foreign Exchange Regulations Act in the late 1970s, the stock market came into its own followed by the first speculative boom of the early 1980s. This collection of private savings was the basis of development of private non-banking finance from the late 1970s.

It is a similar historical conjuncture of proliferation of what today is called multi-level marketing (MLM) schemes that saw the rise of new entrepreneurs many of whom collapsed in their Ponzi bids. But some managed to successfully launder their way to build mammoth empires spanning public deposit mobilisation, infrastructure and housing, media and entertainment, aviation, consumer products, information technology, hospitals, agro-business, mutual funds, housing finance, and hospitality. The accompanying shift towards patron-client relationships between sections of aspiring capitalists and ruling parties became a characteristic feature of Indian political economy since the late 1970s.

So it is no surprise that this much-traversed path would open up in West Bengal sooner or later as part of the rise of such MLM schemes in eastern India spanning Bihar, Jharkhand, Odisha and West Bengal. The spurt of robberies in Bihar in the early 2000s coincided with the collapse of three of the largest Ponzi schemes in Bihar that had proliferated since the 1990s. Hence, Saradha and its partners in crime are part of a larger structural phenomenon of finding an effective way to milch household savings.

Each story has its own particular “innovation” (from Ponzi in 1920 to Madoff in 2008). In West Bengal, it was parivartanwhich promised not only quick fixes to deep-rooted political problems, but also sold the “get-rich-quick” neo-liberal dream in a state where unemployment was close to 11%. This parivartan dream had powerful vendors criss-crossing glamour, political control and lumpenised power, all of which were used to command an organised patron-client structure between the film, media and political glitterati aligned to the ruling party and economic scamsters and fraudsters. This alliance appealed to the lower-middle class and working class base of political parivartan by promising economic quick fixes. It is no coincidence that the chief minister of West Bengal claimed that she had created two lakh jobs in her first year of power. That number is close to the number of MLM agents who signed up for Saradha and its competitors in crime. The same larger-than-life leader who was going to “Save Bengal” as a political messiah was also going to deliver freedom from the inter-generational mass economic hardships through small investments in private enterprises like Saradha, which had on its official payroll leading politicians of the ruling party and sponsorships spanning media, real estate and exports, not to mention fraudulent manufacturing enterprises. Reminiscent of Mackay: “Men…go mad in herds, while they only recover their senses slowly, and one by one…”, the landscape had been painted with the parivartan dream’s diffusion into the reality of fascism.

While the (occasional) irrationality of financial markets is now widely accepted in perceptions of such scams, an ahistorical analysis that focuses on the behaviour of small investors does not permit any structural understanding. The laws against money laundering have been in place since the late 1970s. But those are not preventive in nature. Twenty years of deregulation of the financial sector in India has made these laws toothless. On the one hand, it has paved the way for asset-stripping of the state and financialisation of household assets and on the other, compounded by the global crisis, it has slowed the growth of corporate savings and investments. The regime of accumulation is thus geared towards contractor capitalism’s Ponzi bids riding the crest of desperation of a protracted agrarian crisis. Sudipta Sen and Saradha are not isolated instances but the systemic surfacing of the poisonous potion that the crucible of fascist politics and neo-liberal politics can possibly brew.