In February 2018, India was rocked by news of a massive case of bank fraud, involving some of the country’s wealthiest and most well-connected citizens as well as its third largest bank. The incident, referred to as The Punjab National Bank (PNB) Scam, involved diamond industry billionaires Nirav Modi (no relation to the Indian Prime Minister) and his uncle Mehul Choksi conspiring with PNB officials to obtain fraudulent letters of undertaking from foreign banks to make payments to overseas suppliers. These letters of undertaking, worth $1.8 billion according to Forbes, were essentially promises by PNB to pay foreign banks in case of default by Modi, Choksi, and their associated corporations. Upon discovery of the scam, Modi and Choksi fled the country, leaving PNB to bear the loss.

The PNB scam, in addition to triggering massive public outrage towards the perpetrators, threatens to have detrimental effects on India’s diamond industry. The scam hit especially hard in India, a country with colossal and growing inequality, and high corruption, where the wealthy and well-connected appear to get away with anything while hundreds of millions live in poverty. The political response in India was swift, with every major Indian politician condemning Modi, and calling for him and his uncle’s immediate extradition back to India.

Although the official Indian reaction to the scam has focused on seeking punishment for Modi and his affiliates, the public reaction has generally overlooked the far-reaching pact of the scam on the Indian diamond industry, as well as on Indian industry at large. The scam threatens to gravely damage India’s massive and fast-growing diamond industry with reduced access to vital lines of credit from foreign banks and an industry exodus to countries viewed as having a more ethical business climate. Through these adverse effects, the PNB Scam unveils the problems with the Indian diamond industry, and highlight how India, and emerging markets in general, must stamp out corrupt business practices if they ever hope for local industry to thrive in the global economy and attract foreign investment.

According to The Economic Times, the Indian diamond industry is by far the world’s largest, accounting for 70 to 75 percent of diamond exports in the world and growing at 10 to 15 percent a year. According to the Indian Gem and Jewelry Export Promotion Council, 93 percent of all rough diamonds in the world are polished in India. The industry is a significant sector of the economy in Mumbai, India’s financial capital, and Surat, India’s “diamond city”. Mumbai houses the world’s largest diamond exchange. In Surat, a city of 6 million people, 1 million work in the diamond industry.

The revelation of the PNB scam has exposed the susceptibility of the diamond industry to corruption because of its vulnerability to fraud and opacity. India’s diamond industry is unique in how its structure relies on personal connections and consists mostly of smaller traders. The industry is dominated by businesspeople from the western state of Gujarat, who have historically relied on family and social ties to run diamond businesses. This results in a highly efficient system of vertical integration from mine to showroom. The industry consists of a few behemoth corporations and tens of thousands of smaller traders. Nirav Modi and Mehul Choksi were two of the biggest players in the industry, running two of India’s largest amond corporations, Nirav Modi Haut Diamantaire, and The Gitanjali Group, respectively. The two had largely built their businesses using family connections. The fact that the Indian diamond industry relies on family connections is essential to understanding the story of the PNB Scam because such reliance naturally increases the potential for fraud.

In addition to most diamond businesses in India being run using family connections, another unique feature of the industry is how most transactions are conducted with cash under the table. This is a widespread feature of Indian industry at large. Along with the extensive use of family and social connections, this provides room for unethical business practices and has contributed to the diamond industry in particular earning a dishonest reputation. Furthermore, the industry remains lightly regulated and is widely used for money laundering and tax evasion in India.

The scam’s immediate effects on the diamond industry itself are felt most strongly by the smaller diamond traders in the form of limited access to credit and threatening industry movement. Just months after news of the scam broke, the Indian diamond industry, especially small to medium sized traders, is feeling the ripple effects of the scam in the form of greater difficulty in obtaining credit and through threats of international suppliers shifting operations to countries viewed as having less corrupt business climates. Senior diamond traders in Mumbai and Surat are already reporting banks asking for higher collateral on lines of credit. According to Dinesh Navadiya, past president of Surat Diamond Association, “securing bank loans for small diamond businesses may become very tough. The banks have not been very keen to give loans to small diamond units, and with the Nirav Modi scam, credit line will dry down.” This drying down of credit for smaller operations should be of grave concern to Indian diamond businessmen and policymakers, as the cutting and polishing of smaller diamonds forms the bulk of the industry and has long been an area where Indian expertise surpasses that of the West.

The diamond trading community also fears that many diamond businesses will shift their cutting and polishing operations to Belgium and Israel, countries that dominated the diamond industry before India became the major player in the field. Praveen Shankar Pandya, past chairman of the Gem and Jewelry Export Promotion council, said, “players may now shift their businesses to Belgium and Israel though we will try to see that it does not happen.” Thus, the PNB scam reveals the dangers to emerging market industries of a loss of credibility due to high-profile corruption.

Although Indian business leaders and politicians have announced potential solutions to prevent such high-profile corruption cases from repeating themselves, these “solutions” do not go far enough to address the problem at the core of the issue. On March 1, just weeks after news of the scam broke, the government approved the Fugitive Economic Offenders Bill that gave he government the power to confiscate assets of fugitive economic offenders. Although this bill was well-intentioned, it was clearly designed more to quell public anger at the individuals involved and desire to see those individuals punished, while not actually addressing the widespread corruption and unethical business practices at the heart of the issue.

A government reform passed in the wake of the scam that actually could go a long way in preventing similar scams in the future, is the Reserve Bank of India (India’s central bank) scrapping of the letter of undertaking as a banking instrument. The letter of undertaking had long been used by state-owned Indian banks like PNB to avoid doing due diligence themselves and to rely on foreign issuing banks to check Indian borrowers’ credit instead. This reform has more promise because it will incentivize Indian banks to improve their due diligence practices, including rooting out corruption among bank employees and generally improving the operation of the often bloated and poorly-run state-owned banks that dominate India’s banking sector. Potential future banking reforms include lessening state-owned banks’ control over the banking sector to introduce more private competition. In addition, a proposed reform supported by the Surat Diamond Association is the establishment of designated bank branches meant to deal exclusively with the diamond trade. All of these reforms could go a long way in improving the general efficiency of Indian banks and their dealings with the diamond industry.

As for reforms that could help weed out corruption in the diamond industry, one that has had significant success has been the Modi government’s demonetization campaign. This campaign, undertaken in November of 2016, involved the Indian government stripping rupee notes of certain denominations of their legal value and requiring that people convert existing notes in these denominations into other notes at banks. These notes were in the denominations that people most commonly used for under the table transactions and money laundering. Demonetization was part of the Modi government’s wider anti-corruption campaign. Although demonetization led to a temporary blip in India’s diamond industry because the vast majority of transactions were conducted in cash, the industry has bounced back stronger than ever after, as demonetization has resulted in many illegal and inefficient traders being forced to close down. This has caused business to shift to larger more reputable firms that have long relied on cashless transactions. This shift has been successful because global customers greatly prefer cashless transactions, thus increasing export demand for diamonds polished and cut in India. Although this reform intended to stop corruption in India did not stop the PNB scam specifically, in the long term, it has the potential to clean up an industry riddled with shady business practices at all levels, perhaps resulting in a business environment where such a scam could never have happened.

 

On a calm Saturday morning in September, Indian Prime Minister Narendra Modi and many of India’s political elite landed at San Francisco International Airport. The Bay Area’s tech titans anticipated his arrival for weeks. Over the course of the next two days, he received a VIP treatment unlike any, from the likes of Elon Musk, Mark Zuckerberg and Tim Cook. For Modi, this trip was an opportunity to expand his country’s business potential and encourage bright Indians to stay back home. For the tech titans, it was an opportunity to break into the fastest growing market on the planet.

Modi is a controversial figure in his homeland. In his previous tenure as Chief Minister of the state of Gujurat, he was condemned by many for not intervening in the state’s 2002 riots, in which over a thousand people died. This led to many decrying him as unsuitable for the country’s highest political office. Even after being elected, Modi continues to face opposition from a variety of parties and political groups for his supposed Hindu nationalism in a country where, according to Qatar-based publisher Al Jazeera, over 200 million Muslims reside.

In spite of this, his desire for a strong pro-business environment to expand India’s economy has garnered him a wide range of support. His push for expedited technological progress and fight against anti-corruption in a country where such behavior is commonplace catapulted him to the top of the general election race in 2014. His visit to Silicon Valley in September sent a clear message to his detractors that he was resolute on creating an Internet-connected and tech-savvy India.

For the Silicon Valley CEOs, Modi’s visit was important for business opportunities. According to the Organization for Economic Co-operation and Development, over the past seven years India’s real GDP growth has averaged nearly 6.9 percent per year, which suggests India has potential to be a strong market in the future. But the real reason for India’s increased attractiveness to Silicon Valley titans can be seen by the perceived limitations of China.

China’s recent economic stagnation (India has had three consecutive quarters of higher growth), and its political barriers have restricted the success of many technology firms. Facebook has been banned from the country since 2009; its 2014 WhatsApp acquisition was largely the culmination of five years of efforts to regain access to China’s 600 million Internet users. In spite of Mark Zuckerberg’s efforts, according to Statista, WhatsApp maintains a measly 23 million users in the mainland, or only about four percent of mobile Internet users. Similar numbers appear for other technology companies: Google maintains only about an 11 percent market share in the search market and Twitter is banned inside the country, reducing its effective user base almost immediately. Chinese competitors, such as Baidu and WeChat, have also grown from Western clones to highly sophisticated services specialized to meet the needs of the Chinese market.

Contrast the above scenario with India. According to The New York Times, India will reach nearly 168 million smartphone users this year, with 300 million Internet users overall. Facebook already has 138 million users in India, trailing only the United States. A similar situation arises for Google India, which is behind only the United States by the number of searches. But it is the prospect of the unconnected billion plus users in the country, many of which have never been on the Internet, that is a tantalizing prospect for Silicon Valley. Modi’s commitment to improving India’s technological infrastructure and his allowance for companies such as Twitter and Google to send out real-time cricket scores via text and lay down fiber-optic networks, respectively, represents a departure from previous administrations.

Even though sizable technological upgrades are needed in the country, Silicon Valley’s most prominent CEOs believe the penetration opportunity is worthwhile and have already begun to invest in development initiatives. Google’s CEO, Indian-born Sundar Pichai, has announced that his company will provide Wi-Fi service to 400 train stations across the country, serving over 10 million passengers daily. To combat slow service speeds, which can run at a hundredth of the speeds Americans have, Google is compressing web pages on its servers, to use 80 percent less data and load four times as fast; YouTube videos can now be downloaded on a Wi-Fi network for offline viewing. To connect with lower-income Indians, Facebook has spread the reach of its Internet.org project, which provides free access to a package of mobile apps on mobile apps. Google, Facebook, and Twitter have all added support for various Indian languages (India has over 20 official languages).

But while Modi’s visits have created a wave of excitement in the United States, the response back home has been mixed. The start-up and entrepreneurial community in India has been muted. The country has long battled a “brain drain,” a so-called emigration of its brightest minds to other countries in search of better opportunities, as evidenced by the half-million foreign Indian workers, according to The New York Times, in Silicon Valley. There are also fears that preferential treatment of U.S. tech companies could make it more difficult for home-grown entrepreneurs to draw traffic to their own websites.

These fears are not completely unjustified. According to the Financial Times, Uber is decried in India as an example of a foreign company overstepping its bounds. A national outcry occurred in December, when an Uber driver in Delhi was convicted of raping a woman. Afterwards, it was discovered that Uber did not conduct background checks on its Indian drivers and did not have panic buttons in their cars. Uber has been restricted since, and local taxi unions have lobbied with increasing force against the ride-sharing company’s expansion.

Nevertheless, all current signs point to a bright future for the Indian technology sector. According to a Nasscom-McKinsey report, the overall market is expected to grow from $132 billion currently to $225 billion by 2020 and nearly $350 billion by 2025. Domestic consumption of technology-related goods and services over the same period is expected to double from $34 billion to over $70 billion. It should be noted these figures did not take into account the aggressive expansion that Modi’s alliance with Silicon Valley could bring to the Indian subcontinent. Their ambitious plans could accelerate growth at a far faster pace.

In previous years, this growth was limited through complex bureaucratic regulations and a dearth of foreign capital. An important tenet of Modi’s election campaign was his promise to cut said regulations in the hopes that foreign firms will prioritize India. His warm reception in Silicon Valley and the persistence of companies like Uber to gain a footing in the subcontinent indicate that the interest is there.

Although it remains to be seen when the world’s largest technology companies can make a sizable impact in India, the payoffs for both India and Silicon Valley could be enormous.

 

With its sleek design, eco-friendly emissions and highly affordable price, the Tata Nano stands to be one of the most memorable auto inventions by an Indian car manufacturer. On January 10th, 2008, Tata Motors Limited, a subsidiary of the renowned Tata group, dazzled the world with the design for the Tata Nano at the 9th annual Auto Expo held at the Pragati Maidan in New Delhi, India. Since its debut, the Tata Nano has gathered international attention for its production.

On the day of its introduction to the international community, Mr. Ratan N. Tata was quoted saying, “Tata Motors’ engineers and designers gave their all for about four years to realise [sic] this goal. Today, we indeed have a People’s Car, which is affordable and yet built to meet safety requirements and emission norms, to be fuel efficient and low on emissions. We are happy to present the People’s Car to India and we hope it brings the joy, pride and utility of owning a car to many families who need personal mobility.”

Holding the Guinness Book of World Records position for cheapest car at a starting price of Rs. 100,000 (~$2000 USD), the Tata Nano was designed for the working class in India. Currently, there are more two-wheelers (motorcycles, scooters, and mopeds) on the road than cars in India. Tata Motors seeks to change that by targeting a crowd that would otherwise purchase two- wheelers. In addition to its affordability, the car is also known for its fuel efficiency, boasting a gas mileage of 20 km/liter (~56 mpg).

The production of the Tata Nano holds many promises for both domestic and international markets. Firstly, the Tata Nano is projected to expand the Indian car market by 65% according to the rating agency CRISIL. In fact, in anticipation of the Tata Nano, the market for two-wheelers has plummeted as buyers look to purchase this new four-wheeled vehicle. The car’s fuel efficiency seems to be a main attractors in a nation where diesel prices still remain around 50 rupees per liter (~$3.86 per gallon).

With the current energy crisis across the world, the Tata Nano just might become world’s cure for international consumers. . With its trendy design, fuel efficiency and affordability, the Tata Nano will likely spread to international markets, thus allowing India an entrance into the car export market. However, it is unlikely that the car will hit American or British markets because of its relatively poor emissions and safety standards.
In fact, the vehicle is receiving much backlash from critics due to its poor emissions from using diesel fuel. In a country where air pollution has already reached intolerable levels, any additional air pollution is unacceptable. Daniel Esty, an environmentalist at Yale University, sees the Tata Nano as a source of huge destructive potential. “This car promises to be an environmental disaster of substantial proportions,” Esty said. In response to this criticism, Tata announced its plans to produce a gas- or electric-variant as soon as the current model hits the market. Countries have also cited the safety standards of the Tata Nano as hazardous, calling it a potential deathtrap.

However, in a country where lorries and other large vehicles dominate the roads in big cities and villages, accidents will always be a problem; auto-accidents claim the lives of about 90,000 people per year in India. As the number of cars increases, the risk of auto-related accidents would also increases, especially due to India’s poor road conditions and the lack of traffic signals. Despite these speculations, Tata Nano has passed the international guidelines for the full frontal crash test, the offset, and side-crash test.

So even if the Tata Nano is not exported to the international market and produced exclusively for India, other car companies are certainly impressed with its ingenuity in design and are looking to emulate the affordability of the car in their models. When asked about the Tata Nano, CEO of Renault-Nissan Carlos Ghosn said, “This is really fantastic. This is what we should try and achieve.” Already, Bajaj Autos is working with Renault Nissan to produce a competitor vehicle of nearly the same specifications.

As of now, Tata has yet to announce a release date for the vehicle. Unfortunately, there exist quite a few setbacks for production. With increasing material costs, the price of Tata Nano could be higher once in commercial production. Because Tata’s most unique quality lies in its affordability, an increase in price could and would its expected sale figures. As such, Tata must either use cheaper materials or ask the Indian government for tax-breaks and subsidies in order to lower the prices.

Whatever the future of the Tata Nano, the hype surrounding this car has made a clear statement to to automotive makers around the world: a car’s price tag – not safety or luxury – will ultimately drive its dominance in developing countries.