MUMBAI: India should dismantle its large conglomerates to expand competition and diminish their ability to charge higher prices, ex-Reserve Bank of India deputy governor Viral Acharya has argued in the latest paper for Brookings Institution, an American research group.
According to Acharya, who is now a professor of economics at New York University (NYU) Stern, “industrial concentration” which refers to the extent to which a low number of firms account for total production in a country, demolished sharply in India after 1991 when the country opened up its economy, and state-owned monopolies start giving away their market share to private enterprises. But after the year 2015, it began increasing again.
India’s great five conglomerates
The share of India’s “great five” conglomerates, the Reliance Group, Adani Group, Aditya Birla Group, Tata Group, and Bharti Airtel in total assets of non-financial sectors rose from 10 percent in 1991 to nearly 18 percent in 2021.
They “grew not at the expense of the little firms, but of the next largest firms”, says Acharya, because the share in assets of the next five business groups halved from 18 percent to 9 percent during that period.
There could have been several drivers of this, according to Acharya – their ability to acquire large distressed companies, the growing appetite for mergers and acquisitions, and India’s industrial policy of creating “national champions via preferential allocation of projects and in few cases regulatory agencies turning a blind eye to predatory pricing”.
The trend raises many concerns, according to the ex-deputy governor. These include “the high risk of crony capitalism, i.e., political connections and ineffetive project allocations, related party transactions within their byzantine corporate organisation charts”, negotiations on excess debt to fund their expansion and preventing competitors from entering the market.
Excess leverage was, actually, one of the several red flags that United States-based short seller Hindenburg Research had raised against the Adani Group recently. The report led to billions of dollars being rub from the stock market.
In other nations, this has had far graver deluge effects in the past.
“National champions can easily become overleveraged and collapse, gravely damaging the overall economy, as has occurred in other Asian nations, most spectacularly Indonesia in 1998,” Josh Felman, ex-India head of the International Monetary Fund (IMF), told the BBC.
In a February column for Project Syndicate, Nouriel Roubini, the economist, expressed concerns about India’s economic model of giving a few “national champions” and “large private oligopolistic conglomerates” control over important parts of the economy.
“These big Conglomerates have been able to capture policymaking to benefit themselves,” wrote Roubini. He said the phenomenon stifled revolution and disallowed entry of start-ups and other domestic beginners in key industries.
