India needs its conglomerates

A call to dismantle them when the world hasn't done so is economic hara-kiri

Economists seem to be living in a time-warp, an alternate universe divorced from current realities. When you hear the same remedies being trotted out repeatedly, no matter what the situation, one wonders if they are capable of agile thinking.

A former deputy governor of the Reserve Bank of India, Viral Acharya, has listed five challenges for India’s continued growth. Some of them are motherhood statements which few can disagree with, but others involve a substantial disconnect from current geopolitical realities.

In a paper published by Brookings Institution in March, Dr Acharya says that India’s rush to catapult itself higher in the manufacturing league is unbalanced and led heavily by large conglomerates.

Dr Acharya writes: “In my assessment, restoring industrial balance requires (i) reducing tariffs to increase the country’s share of global goods trade and reduce protectionism; (ii) dismantling the largest conglomerates to increase competition and to reduce their pricing power; and, (iii) ensuring the bankruptcy code is ready to deal with large conglomerate defaults should they materialise.” (You can download his full paper from https://bit.ly/ 3nB2jOy)

Dr Acharya believes that “creating national champions” is new India’s “industrial policy”, and this may be “feeding directly into keeping prices at a high level, with the possibility that it is feeding ‘core’ inflation’s persistent high level.”

This is a giant leap from questionable assumptions in the current global and domestic context. The operative phrase above is “the current global and domestic context.” If you suggest the same remedies no matter what the context, one has to question one’s ability to think outside the box.

This article focuses on whether the call to dismantle conglomerates at this particular juncture in India’s growth story is right. But before that, we must also contest the claim that high core inflation may be directly related to the higher pricing power of the Big Five conglomerates, which Dr Acharya lists as the Reliance group, the Tatas, the Birlas, the Adanis and Bharti Airtel.

Dr Acharya bases his advice to disband these conglomerates on two premises: One is the ability of the Big Five to raise prices at a significantly higher rate than their cost of inputs. The second is the rising share of the assets of the Big Five in the non-financial sector from 10 per cent in 1991 to nearly 18 per cent in 2021. The share of the Next Five fell from 18 per cent to nine per cent.

While one can readily concede that scale and size can give big groups pricing power, the relationship with core inflation is suspect. The fact is “core inflation” has been elevated for more than a decade and has had little to do with conglomerate power. Between 2012-13 and now, core inflation has never fallen below 4-4.5 per cent, and was, in fact, highest (over eight per cent) in 2012-13, when the size differential between the Big Five and the Next Five was smaller.

The consumer price index, which is what the Monetary Policy Committee uses as the benchmark to decide interest rates, has been impacted more by agricultural and fuel prices, both of which are heavily impacted by government policies. In neither of these two constituents of the price index do conglomerates have much power.

The second point, that the Big Five are eating into the shares of not just the small and medium sectors, but the Next Five too, is questionable for two reasons: The year of comparison, 2021, was a Covid year, when expansion was very difficult for all players, and it is not surprising that the Big Five could continue expanding by purchasing assets at lower prices. The four years before 2021 were also marked by a shrinkage of major indebted groups, including the Ruias, who lost their biggest assets in steel and oil, the Anil Ambani group (telecom and finance), and the GMR and GVK groups that benefited most in the United Progressive Alliance (UPA) years, not to speak of other infrastructure players. It is only now, post-Covid, that the new Next Five can begin to grow again, and they will gain asset share when the economy recovers sustainably. The sharp decline in the asset shares of the Next Five can be traced largely to the initial effectiveness of the Insolvency and Bankruptcy Code, and the Covid crisis.

There are other reasons why any premature attempt to dismantle the big conglomerates will do more damage than good.

First, dismantling Indian big business is no different from calling for unilateral disarmament in a world that is feverishly rearming. If India were to dismantle the only companies that can take on Amazon, Apple, or Walmart in the domestic market, we are essentially asking for the wholesale takeover of Indian manufacturing and services by foreign players. We need to see how effectively America and Europe dismantle their Big Five before we do anything similar here. We should not commit hara-kiri.

Second, we cannot forget geopolitical realities. Whether India is trying to create “national champions” or not, the fact is post-Covid, and with the rise of China as a global bully, supply chains are being “near-shored” or “friend-shored”. This implies that they are being reworked for reasons of geopolitical expediency and not economic rationale. And when one hears US President Joe Biden’s top economic advisor, Bharat Ramamurti, say that the US wants all supply chains to begin and end in his country, one wonders which world Dr Acharya is living in. Decisions on which industries to protect or left alone are taken with geopolitical realities in mind, and economic competitiveness is only one of the factors impacting them.

Third, the question of abuse of market power and cartelisation should be a matter for the Competition Commission of India, not economists. Any view on dismantling big conglomerates without first demonstrating that they are actively throttling competition is mere supposition, not established fact.

Fourth, the rise of conglomerate power will, sooner than later, help the rise of supply chains aligned to them, which will create the next layer of innovative and competitive middle-sector companies. Only these can create quality jobs without endless government subsidies.

Fifth, we need more big and medium-sized formal sector companies, since only they have the wherewithal to provide female-friendly workplaces. India’s female work participation rate will not grow significantly without a rising share of the formal sector in the economy, which Dr Acharya says is one of India’s contradictions.

Sixth, it is impossible to create a competitive economy without the scale and size that only conglomerates can provide. The rise of Japan, the Asian Tigers and China were all facilitated by government policies and inter-linked business groups (the Keiretsus and Chaebols). These countries may not need these structures now, but India surely needs its conglomerates to provide the long-term financial muscle to bankroll investment and withstand occasional failures.

India’s conglomerates are a necessary condition for India’s rise. The time to dismantle them is not now.

The writer is editorial director, Swarajya Magazine