Missing capital: India’s trillions-dollar wealth is chained in slums. Time to unlock it

By @ArguingIndia



India needs an investment of around $1 trillion a year over the next five years, if Indian GDP is to grow above 10 per cent to create about 70 to 80 lakh new jobs annually to absorb all new entrants to the job market. Finding the required pool of savings, and, more crucially, the entrepreneurs to use this pool of capital productively is a herculean task.

However, as I show below using ideas generated by Peruvian economist Hernando de Soto, a substantial pool of this capital, something like $2-3 trillion, already exists in the country but remains not fully tapped. More than that, some two-three million small entrepreneurs have this capital in their possession but cannot fully deploy it, although they have tremendous experience in running small businesses successfully.



India’s unproductive capital wealth


In his book, The Mystery of Missing Capital, Hernando de Soto writes: “Capital is the force that raises the productivity of labour and creates the wealth of nations. It is the lifeblood of the capitalist system, the foundation of progress, and the one thing that the poor countries of the world cannot seem to produce for themselves, no matter how eagerly their people engage in all the other activities that characterize a capitalist economy.”

Developed countries, on the other hand, are awash with capital despite lower GDP growth and abysmally lower savings rates. Why is it that millions of hardworking, self-employed entrepreneurs, who save as much as 35 per cent of their earnings, are short of capital for expanding their businesses, and are unable to break out of the chains that bind them? What keeps them from greater prosperity despite such hard work and extraordinary risk-taking? This is the paradox that Hernando sets out to demystify.

Before we can get set to this task, we need to understand the link between property and capital on one hand, and how and when property becomes full-fledged capital that can be put to multiple uses in the economy, on the other. Property here means any asset an individual possesses – bank account, financial asset, or real estate. We will focus on real estate since self-employed entrepreneurs mostly use this asset for savings.

What is the problem with holding such a property in a slum? As Hernando explains, these resources are held “in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.”

Applying Hernando’s model to our taxi driver’s case makes three points clear:

1. The taxi driver’s ownership of the shanty is not visible to anybody in the larger economy due to the absence of a formal title and its registration in his name. He owns the shanty, he has put years of savings in it, but he cannot use it outside of the local slum’s knowledge. The important point to note is that no asset can become property, and eventually a capital that is fungible with other capital stock in the economy, unless it is legally tied to an individual. That is the irreducible minimum in the process of converting property into capital.

2. The taxi driver’s property has a single use. The owner and his family can use it among themselves but cannot use the shanty as, say, collateral for a bank loan to buy another taxi and expand his business or develop his farm back home in Bihar or finance his child’s study in a good professional college. The utility or productivity of his property is, thus, not going to be fully exploited. In other words, the self-employed entrepreneur is hugely handicapped because he cannot reap the full benefit of his savings for want of a formal property system that can recognise the value of his savings – which, incidentally, are real and as hard-earned as any legally recognised savings.

3. The taxi driver’s property is not fungible with his other assets or with other such assets in the economy as a whole. His property is neither proper capital for himself nor others in the economy. In other words, his capital, created out of hard-earned savings, is hobbled, chained and cannot become productive to create wealth for him or others unless we find a way to make it fungible with other capital stock in the economy. That is the mystery of missing capital stock in the third world. It is there but we have not yet learned how to unlock it and bring it into use as full-fledged capital stock.

Not capitalism, but Indian capitalism’s fault


Hernando says that it is this handicap – lack of visibility, missing individual identity tied to title, and lack of fungibility with other capital stock – that makes it look as though capitalism doesn’t work for the poor in third world countries.

“The enterprises of the poor are very much like corporations that cannot issue shares or bonds to obtain new investment and finance. Without representations, their assets are dead capital. The poor inhabitants of these nations — five-sixths of humanity — do have things, but they lack the process to represent their property and create capital. They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. It is the unavailability of these essential representations that explains why people who have adapted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalism work,” Hernando explains.



How can these defects in Indian property systems that prevent recognition of invisible and hobbled pools of capital be cured in order to make them as productive as any other capital?

It requires attitudinal changes and deep reforms in our systems that govern property.

Hernando explains why the process is simple but again not so visible to us. “But only the West has the conversion process required to transform the invisible to the visible. It is this disparity that explains why Western nations can create capital and the Third World and former communist nations cannot. The absence of this process in the poorer regions of the world –where two-thirds of humanity lives – is not the consequence of some Western monopolistic conspiracy. It is rather that Westerners take this mechanism so completely for granted that they have lost all awareness of its existence. Although it is huge, nobody sees it, including the Americans, Europeans, and Japanese who owe all their wealth to their ability to use it. It is an implicit legal infrastructure hidden deep within their property systems – of which ownership is but the tip of the iceberg. The rest of the iceberg is an intricate man-made process that can transform assets and labour into capital. This process was not created from a blueprint and is not described in a glossy brochure. Its origins are obscure and its significance buried in the economic subconscious of Western capitalist nations.”

What is clear is that property systems to govern property and convert it into productive capital stock were invented by Western nations long ago when they faced similar problems as we face in our shanties and slums today. The so-called squatter problem that bedevilled the USA for 100 years in the 19th century is one such example. So, we do have templates to resolve the problem:

“Western politicians once faced the same dramatic challenges that leaders of the developing and former communist countries are facing today. But their successors have lost contact with the days when the pioneers who opened the American West were undercapitalized because they seldom possessed title to the lands they settled and the goods they owned, when Adam Smith did his shopping in black markets and English street urchins plucked pennies cast by laughing tourists into the mud banks of the Thames, when Jean-Baptiste Colbert’s technocrats executed 16,000 small entrepreneurs whose only crime was manufacturing and importing cotton cloth in violation of France’s industrial codes. That past is many nations’ present. The Western nations have so successfully integrated their poor into their economies that they have lost even the memory of how it was done, how the creation of capital began back when, as the American historian Gordon Wood has written, “something momentous was happening in the society and culture that released the aspirations and energies of common people as never before in American history.” The “something momentous” was that Americans and Europeans were on the verge of establishing widespread formal property law and inventing the conversion process in that law that allowed them to create capital. This was the moment when the West crossed the demarcation line that led to successful capitalism – when it ceased being a private club and became a popular culture, when George Washington’s dreaded “banditti” were transformed into the beloved pioneers that American culture now venerates.”

Unshackle locked up wealth


How was it done? Quite simply by recognising that formal law follows custom and what is created by custom in slums and shanties is as valid as any other economic process that converts savings into property and then useable capital. These laws have their own logic, validity, and set of practices that we need to recognise and incorporate into our formal systems. These slums and shanties are decades old. The one at Cuffe Parade is more than 50 years old. The original squatters are all gone. The current owners are third generation occupants who bought these properties with hard-earned savings with legitimate income. These shanties represent a significant portion of their life savings. By keeping them out of the formal property system, we are neither going to get rid of the slums nor can we find a way to use the locked up idle capital productively to create more income and wealth.


Such locked up but idle wealth/capital is huge by any measure. A rough estimate – the total capital lying idle at just one of the slums next to Navy Nagar, Mumbai, is in excess of $3-5 billion. The total wealth lying idle in the Dharavi slum is estimated to be upwards of $200 billion. Multiply these slums across metros and major towns and the unused and untapped hidden capital could be upwards of $2-3 trillion. The slums and shanties represent a huge drain on our wealth for what really requires nothing more than a clear-headed policy towards urban property.

If we can find the political will to integrate the property already present but locked up and idle in the shanties and slums across India, we could set free some $2 trillion worth of additional capital to work for creating more wealth and capital for our self-employed and other entrepreneurs. This is not difficult given the requisite political will.

In the second part of this article, we will return to examine the specific in which this hobbled wealth can be put to use in the economy to boost its productivity and increase our GDP growth rate.

This article has been updated to reflect a change. Hernando de Soto is a Peruvian economist.

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Was Indian Election 2019 a Victory for Populism

By Shealja Sharma  @ArguingIndian

Sonali Ranade @sonaliranade


Modi’s victory in 2019 is a triumph of populism over a liberal democracy.  Populism has often been defined as an illiberal democracy that relies on majoritarianism but bypassing many of the others aspects critical to a democracy. Populism poses a direct threat to democracy and its institutions.  Democracies are uniquely susceptible to populism and have a way of being waylaid by it from time to time.  India itself has witnessed a spell of populism under Indira Gandhi in the early 70s that did not play out well and culminated in an emergency where democracy itself was derailed.  It is imperative therefore to pause at this juncture to understand what is exactly is populism, and how and why democracies succumb to it. Political scientists have studied Populism’s political character and it well worth reviewing this here in order to be better placed to negotiate the perilous way ahead.



Populism may be defined as a process of political mobilization that transcends party structures and seeks to build people’s support around a charismatic personality by creating a direct link between the leader and people using mass communication technologies like the media, including social media, mass rallies, propaganda etc.  The essential difference between a populist mobilization and other forms of political mobilization is that the link between the leader & supporters is direct, non-intermediated by political party or institutions, and light on ideology. The person of the populist leader is the rallying cause per se. The causes he or she espouses are transitory, ever changing according political need, and are usually formulated in such way as to cut across all established political parties and structures. For instance Modi’s appeal to Hindu nationalism is designed cut across the usual caste and class structures around which normal politics has been built so far.  Populism also seeks to create a people vs. other paradigm where the other may be economic, social or political elites, minorities, and liberals, whatever. The aim is to fragment existing political structures and attract support of the floating opinion towards the strong & charismatic personality of the leader.  The causes could be anything from ethno or religious nationalism, communal polarization, to vaguely structured peoples vs. established elites.  The cause itself is secondary but focuses on an existing political fault line.



Populism doesn’t arise in vacuum.  It is usually a reaction to something else that happens in the polity or the economy.  Looking at the way populist movements arose in history, from that in Germany in the 1930s, to those caused by failing economies in Latin America to our very experience with populism under Indira Gandhi, we may surmise that populism is occasioned by a breakdown in the ability of existing political parties to cope with change in the polity.  In the case of Indira Gandhi, the patronage distribution system on which the Congress party was built broke down after Nehru’s death.  Without control of the brokers who worked the system, Indira Gandhi had no choice but to resort to populism appealing directly to people with a catchy “Garibi Hatao” slogan over the head of the Congress party.  This ruptured the party apparatus, split it into two, but she was never able to rebuild the patronage system in full in all geographies.  With that began the decline of the Congress party structures. Elsewhere in the world, populism has arisen out of an economic crisis as in Latin America or collapse of political system as in the post communist soviet system.  Presently, we are seeing populist movements in Europe and US triggered by threat of immigration.  Whatever be the proximate cause, populism is invariably accompanied by an inability of existing political structures to cope with a discontinuity in the political, social or economic environment.


Closer to our times, we witnessed such a discontinuity in the system occasioned by bankruptcy that necessitated economic reforms. As consequence of those reforms, the patronage system of the Congress party was shattered in 90/91 because they transferred effective power over resources from Centre to States. Effective control of the patronage system had already faced considerable dilution as sub-national actors within or outside the Congress captured power in the States.  They developed their own patronage networks and cultivated their own satrapies often using populism as the means to build support for themselves using sub-nationalism & regional pride.  We saw such satrapies in Andhra, Bihar, Tamil Nadu, and West Bengal. Indeed we saw one in Gujarat under Modi himself.  This shattering of the patronage system within the Congress party structures at the Centre created a vital power vacuum that was never filled under Sonia Gandhi or Manmohan Singh.  Irony is that Congress lost power because it dismantled its own funding model without creating an alternative.  It is not corruption but lack of it under UPA I & II that led to its downfall. Which not to say there were no corrupt ministers in UPA.  Merely, that the funds they raised didn’t get to the central kitty.  Which perhaps explains the alacrity with which BJP filled the vacuum with anonymous electoral bonds.  Corruption is now fully sanitized & legal.


Modi’s populism is therefore a reaction to the breakdown of the patronage system and an effort to resurrect it under a different name.  However, Modi’s populism is not just the garden-variety pure populism.  Political mobilization is usually characterized as progmatic, patronage based or populist.  A core of progmatic political mobilization represented by the RSS and its vast organizational & ideological resources backs Modi. This progmatic agenda of the RSS relies heavily on communal polarization as well as upper caste opposition to affirmative action. It is anti-Muslim and anti-lower castes. This core however cannot produce the required numbers for electoral domination of the polity. Historically, BJP’s vote share has struggled to get past the 25% mark.  Modi’s utility lies in energizing this core with Hindutva and adding to the core with a lot of floating supporters and unattached voters attracted by his personality as strong leader who has a vision of a strong and prosperous India. That this additional layer of support is ideology-thin is by design, not accident.  The lack of a clear-cut ideology/program gives him flexibility to go for whatever sells at the moment.  It also has the effect of amplifying the Hindutva message which otherwise would be restricted to just the core.


It is also essential to realize that Modi’s populism is the effect of, not only the breakdown of the established patronage system of the Congress, but also a deep response of the people to the populism of populist leaders at the regional and/or State level.  Modi did not invent populism.  That form of political mobilization has long been in use in States be it Tamil Nadu, Andhra, West Bengal, Odisha, Gujarat, Mumbai, Bihar and even Uttar Pradesh under many regional populist leaders like MGR, Karunanidhi, NTR, Mamata Banerjee, Patnaik, Lalu Prasad Yadav or Mayawati.  They were all ideology-thin, non-patronage based political players, who built their parties around a single idea, ranging from regional autonomy in Tamil Nadu, caste based mobilization in UP/Bihar, to regional pride in Gujarat, Bengal etc.  Shiv Sena in Mumbai began its politics as labor union busting organization favored by tycoons but latched on to Shivaji & regional Maratha pride later.  So populism is not something new.  However, these regional populisms have asserted themselves against the center at times, and are seen as centrifugal tendencies that are gathering strength.  At times, populism can only be fought with populism.  Modi has been able to build his version of populism as something countering fissiparous trends in the polity, vaguely portrayed as misguided liberalism, minority appeasement, regionalism or separatism, etc.  It helps that the Border States like Kashmir, Punjab, Bengal, Assam, Tripura, even Kerala with its Dubai connection, have higher percentage of minorities and have been among the first to fall to regional populist leaders.  Tamil Nadu too falls in this category but for a different reason.  This feeling of a latent sub-nationalism led by populist regional leaders evokes a counter in the form of Modi’s potent nationalistic appeal. Whether it is the right response or not is a different matter.  What is important is that Modi is not the only populist in town.


Congress has largely failed to grasp the emerging political challenges after PVNR.  The failure began not with Rahul Gandhi but his mother and at two levels.  Firstly, despite the stunning success of 90/91 reforms, Sonia Gandhi failed to take pride in them and rebuild her party around them.  Instead she continued the party’s hugely dysfunctional and largely futile alliance with a Marxist cabal around her that frustrated all meaningful reforms after PVNR. Secondly, she was unable or unwilling to rebuild the patronage systems her party depended on and allowed a free for all system to evolve that amplified the perception of corruption in her party.  There is simply no escape from the reality of party funds.  If you don’t centralize them, you hand over the party apparatus to regional satraps and pay a double price.  Corruption not only increases but you cannot escape the blame for it.  So under Sonia Gandhi, not only did the Congress lose its ideological moorings to economic reforms but gained a stench for corruption, – largely unjustified and grossly exaggerated – that it has been unable to shake off since.


Rahul Gandhi has been unable to rebuild the Congress party as per his dreams despite a decade of trying.  But like Sisyphus, he keeps trying to roll his heavy rock up the hill in the same way as before, hoping for a change of luck. Just as there is no free lunch in a dog eat dog world, there is no such thing as a lucky break in highly competitive politics.  The fact is RG will never be able to rebuild his party the conventional way because the building blocks no longer exist.  As his party’s empty treasury should tell him, the old patronage system is gone from his grasp.  It has been captured by Modi-Shah and they aren’t about to do him any favors. Without funding party machines cannot be kept in good repair.  They wither away.  Congress now faces the uphill task of finding a charismatic leader who can fashion a populist movement to take on the party juggernaut of the BJP.  It is an advantage that his party once enjoyed.  Now the shoe is on the other foot.  Short of populism, there is simply no other viable alternative for political mobilization available to the Congress any more.  In short he has to the charismatic leader with a powerful populist program that can work on a shoestring budget or it is game over.  He has no other choice.


What of the polity?  It is hard to say how this “national” populism vs. regional populism will play out.  The future is portentous. We can pretend everything is normal now that we have a strong popular leader at the center.  But two things should be clear.  India is a State with 20 odd potential nations who fulfill the criteria of a distinct people, culture, history, language and geographical contiguity.  The regionalism that we see at the periphery is well grounded in latent sub-nationalism. The glue that holds the Indian state together against the regional pull of latent sub-nationalism is a common market, common law, growing economy and most important of all, lived experience. What does not hold it together is a “strong center”. RSS may fondly hope that Hindu-Hindi-Hindustan will hold everything together but this is far from proven.  We will never be able to resort to coercion, alone or in a major way, to hold the periphery.  We will hold them only through a shared vision of the future.


Populism will not suffice to tamp the divisive forces arising out of stoking of Hindu sub-nationalism that has become the defining signature of the Hindu Right.  If anything, it will accelerate the fissiparous tendencies by legitimizing sub-nationalism and provoking regional leaders to exploit it in order to cement support for themselves.  Tamil Nadu provides a classic example of how to build a two party regional political system that shuts out pan-India parties.  The model can be easily copied in other states as well.  The Hindu-Hindi-Hindustan formulation has very limited appeal.  That fact should not be obfuscated by the pan-India appeal of Modi. Nor should we buy the idea that Hindu nationalism per se will unify the polity.  India is just too diverse for that.  We should also not forget that no meaningful economic reform is possible without real economic decentralization and the latter is impossible without regional autonomy.


Wisdom demands Modi dial back on Hindu nationalism. It has served its limited purpose. If at all it had a purpose. Wisdom demands Modi moves to restore the critical institutions of the State & dial back on the cult building around his persona. And wisdom also demands opposition parties sit down together & evolve a common program.  If they don’t hang together, they will hang separately.


Populism has rarely ended well despite good intentions. It is inherently illiberal and impatient with democracy and rule of law.  It is impelled to justify every shortcut with the mandate that the populist leader enjoys.  It refuses to abide with checks and balances of institutions.  And it has scant respect for dissent.  It is impossible to say how India’s second tryst with unabashed populism at the Centre will end.  We can only hope rule of law, democracy and its institutions & the innate good sense of our people will prove enough of a check against its excesses.


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