Published on: 25 September, 2019

As tax evading businesses and investors in real estate stare into the abyss, we look at the forceful resurgence of a north Indian business community which was uprooted by Partition. The Khatris’ history is one of remarkable enterprise and outstanding success punctuated by politically motivated loot of their wealth. Today, with momentum on their side, the Khatris stand second only to the Marwaris in their wealth & power.

“The association of the Khatris and Aroras with business is even more deep…In Jalandhar, Amritsar, and the big towns now part of Pakistan (Lahore, Rawalpindi, Multan and Peshawar) the Khatris occupied the commanding heights of business, ahead of the Banias, who ‘were practically unknown to the West of Lahore.’ They controlled much of the region’s business in shawls and woollens and, along with the Shikarpuri Lohanas, also the overland trans-Asian trade in dry fruits, carpets and furs across the Khyber Pass. In addition, there were migrant Khatri trading families who, from the late eighteenth century, had established themselves in the cities of the Gangetic valley as bankers…and military contractors for the Raj…”Harish Damodaran in  “India’s New Capitalists: Caste, Business & Industry in a Modern Nation” (2008)

Change produces dislocation…
In last week’s note we highlighted how the Indian economy is being altered by resets around reduced use of cash, a crackdown on tax evasion, GST and, more generally, the creation of a more integrated, more networked economy (see https://marcellus.in/blogs/marcellus-dissecting-the-economic-slowdown-in-india/
As better roads & communication networks create a more integrated economy, the rewards for being a broker, trader or intermediary are falling sharply in India. To take an extreme example, in the early 1990s stockbrokers in Mumbai used to earn commissions in excess of 2%. Now, the same profession struggles to get commissions of 0.10%. Why? Because the rise of modern communication networks and low barriers to entry has crushed the returns to being a stock market intermediary in India. A similar fate seems likely to befall tens of millions of Indians who currently earn a living as retailers, distributors, wholesalers or traders either of daily essentials or of commodities.

…and the Khatris have demonstrated how to deal with dislocation
As Indian businesses grapple with economic disruption, they can draw inspiration from North India’s remarkable Khatri community which over the past eight hundred years has suffered brutal reverses and reinvented itself repeatedly. Their ability to respond successfully to setbacks and grasp a wide variety of economic opportunities – from manufacturing, to trading & banking, to being entertainers and even civil servants – sets them apart from India’s other great business communities like the Marwaris, the Gujaratis or the Parsis.

So, who are the Khatris? From our reading of two really interesting books on India’s business communities – Scott C.Levi’s “Caravans: Punjabi Khatri Merchants on the Silk Road” (2015) and Harish Damodaran’s “India’s New Capitalists: Caste, Business & Industry in a Modern Nation” (2008) – and from our discussions with Khatri businessmen, it would appear that the Khatris are predominantly Punjabis and, to a lesser extent, Sindhis, with roots in two cities – Multan and Shikarpur – which lie on the borders of Sindh and Punjab in present day Pakistan. The community seems to be of Kshatriya (warrior) descent and all ten of Sikhism’s gurus appear to be of Khatri descent. Interestingly, in contemporary Pakistan, there are also Muslim Khatris who trace their origins to the two cities mentioned earlier in this paragraph.

From Bankers & Traders to Bollywood & Delhi Royalty: The Khatris’ Reinvention
The earliest records we can find of the Khatri ascendancy is in the two hundred years either side of the sixteenth century. In this 400 year period, the Khatris became the spine of India’s trade with what is today Afghanistan, Turkmenistan, Iran and Russia. Through the passes in the Hindu Kush mountains (Khyber, Bolan, Sangar and Sarwand), the Khatris would take tens of thousands of camels loaded with cotton, spices, weapons & sugar and sell these products in the great bazaars of Iran, central Asia and Russia (all the way up to Moscow). They would then finance the local harvest in the hinterland around market cities like Isfahan, Kandahar, Samarkand, Astrakhan, etc . Then on the way back, the Khatris would import to India hundreds of thoroughbred horses from Central Asia along with dry fruits, fresh fruits, carpets and furs.

As Scott Levi says in his book: “We have seen that, from the Middle of the sixteenth century, the Multanis not only mediated India’s trade with Central Asia, they established settlements in key locations beyond the Hindu Kush and laid the foundation for an extensive commercial network that would endure even into the twentieth century. A circulating population of tens of thousands of Multanis, and then Shikarpuris, moved merchandise, wealth and information between north-western India and distant markets of Afghanistan, Central Asia, Iran and Russia, eventually reaching as far as Moscow and St.Petersburg…From their time as young apprentices, agents of these family firms were instructed in complicated legal codes, accounting techniques, various methods to calculate interest, and other skills that they would need to utilize the commercial techniques available to them…The agents would then be loaned a large amount of capital, usually in the form of cotton textiles, before they would travel by caravan to a distant market. On arriving at these markets…as they gradually sold their merchandise, the agents would reinvest the cash retrieved in other profitable activities, most notably short-term high interest moneylending ventures. Following this model, agents could realise a 200 to 300 per cent annual increase in their total wealth. After several years – the Multanis’ average tenure abroad was seven or eight years – the agents would return home…”

The sheer skill and success of the Multani and Shikarpuri merchants made them obvious targets for envious local elites. The first major attack on the community took place in the middle of the eighteenth century. The Ghilzai Afghans, who occupied the Safavid capital of Isfhan in 1722, came down hard on the Indian merchants by looting and extorting from them. They were overthrown by Nadir Shah in 1736 and he in turn retained policies hostile to the Indians. This gave his supporters a ready excuse to confiscate the Indians’ wealth & properties.

The Indian merchants regrouped under the patronage of Ahmed Shah Durrani (who ruled from 1747 to 1722) and shifted base from Multan to Shikarpur (with the latter city being a Durrani protectorate). The next blow to the Indian merchants came with the rise of Imperial Russia (1865-1918) – during the 1870s the Russians implemented a series of policies designed to undermine the Indians’ business interests in Central Asia. And then when the Bolsheviks took charge in Moscow in 1918 it was game over for the Indian businessmen in Central Asia.

The Khatris then reinvented themselves as regional merchants, moneylenders and officials in pre-Partition Punjab. As Harish Damodaran says in his book, “The majority were merchants, moneylenders and shopkeepers, if not employed as lawyers, teachers, munshis (clerks) or kanungos (revenue officials…). Moreover, the land to which the Khatris belonged had very little industry or rail infrastructure till well into the twentieth century…industry in Punjab was nothing more than an assortment of flour mills, iron foundries, cotton ginneries and shawl-making and carpet-weaving units. The scope for emergence of big indigenous capital in a primarily agriculture-based, landlocked province was limited.”

The Partition of India resulted in the Khatris being dislocated again from their heartland in undivided Punjab. Quoting again from Harish Damodaran’s engrossing book, “The community’s full-fledged emergence on the national business map had to wait for a cataclysmic event like Partition, which literally pushed them in droves towards Delhi and its neighbourhoods. This massive exodus marked a human tragedy unparalleled in history, even as it opened up new avenues for a middle class with sound moorings in education and trade…Proximity to the seat of power provided a platform from where they could be heard and also a vantage position to influence policy. A combination of enterprise, articulation and strategic closeness to the national capital – which, in itself, was becoming a major growth hub…- created conditions for Khatri capital to flourish in the post-Partition period.”

Today the roll call of prominent Khatri businesses is long enough for this community to be rated second only to the Marwaris in the power & influence they wield especially in the National Capital Region (NCR) which is clearly the Khatris’ stronghold with nearly 10% of the population of India’s capital city belonging to that community. However, since the Marwaris were not dislocated as profoundly as the Khatris by Partition, the rapidity of the Khatris’ rise in independent India marks them out as a uniquely resourceful community.

Prominent Khatri businesses include M&M, HeroMoto, Hero Cycles, Apollo Tyres and most of the auto ancillary companies in the NCR (Subros, Rico, Sona Koyo, etc), the various entities of the Thapar group (Ballarpur, Greaves Cotton, Crompton), Ranbaxy, Max Life, East India Hotels, Berger Paints, the Apeejay group (owners of the Park Hotels chain), the late Ponty Chadha (king of liquor distribution in the North) and the India Today group. Most of India’s sports goods industry – centered around Jalandhar and Meerut – is controlled by Khatris. In Bollywood, the Khatris’ supremacy has been absolute since Independence. Raj Kapoor, BR Chopra, Yash Chopra, Subhas Ghai, Dev Anand, Ekta Kapoor, Prakash Mehra, Shekhar Kapur and Vidhu Vinod Chopra are all Khatris.

Investment implications
Many of us see communities in static & stereotypical terms eg. the martial Sikh, the cerebral Tamil Brahmin, the creative Bengali, the cunning Marwari. In the midst of great change, such labels become increasingly irrelevant. As Prime Minister Modi rings the reset bell, entire communities in India look likely to see their fortunes fluctuate. The Khatris’ story tells us that enterprising communities with high levels of education, with access to political power and with the adaptability to move across a wide range of professions will excel in the new India. Unsurprisingly, all of the companies in our Consistent Compounder Portfolio which hail from the NCR have promoters from the Khatri community.
To read our other published material, please visit https://marcellus.in/blog/
Saurabh Mukherjea is the author of “The Unusual Billionaires” and “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”.      

Note: the above material is neither investment research, nor investment advice. Marcellus does not seek payment for or business from this email in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.

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