Ambani, Adani: Should India break up its big conglomerates?

India should break up its big conglomerates to increase competition and reduce their ability to charge higher prices, former Reserve Bank of India deputy governor Viral Acharya argues in a new paper for the Brookings Institution, a US research group.

According to Mr. Acharya, who is now a professor of economics at NYU Stern, says “industrial concentration” — which refers to the degree to which fewer firms participate in the country’s total output — fell sharply in India after 1991, when the country opened up its economy and state monopolies began to cede their market share to private companies. But after 2015, it started to rise again.

The share of India’s “big five” conglomerates – Reliance Group, Adani Group, Tata Group, Aditya Birla Group and Bharti Airtel – in the total assets of the non-financial sectors has increased from 10% in 1991 to almost 18% in 2021.

They “grew not only at the expense of the smallest but also the next largest firms,” ​​says Mr. Acharya, as the share of total assets of the next five business groups halved from 18% to 9% during this period.

There could have been many triggers for this, according to Mr. Acharya – their ability to acquire large companies in distress, the growing appetite for mergers and acquisitions, and India’s conscious industrial policy of creating “national champions through preferential project allocation and in some cases regulatory agencies turning a blind eye to predatory pricing.”

That trend raises several concerns, says the former lieutenant governor. This includes “the risk of crony capitalism, i.e. political connections and inefficient allocation of projects, related party transactions within their byzantine corporate organizational schemes”, taking on excess debt to finance their expansion and preventing competitors from entering the market.

Excessive leverage was, in fact, one of the many red flags that US trader Hindenburg Research recently also raised against Adani Group. The report resulted in billions of dollars being wiped off the stock market.

In other countries, this has had far more severe spillover effects in the past.

“National champions can easily become overstretched and fail, seriously damaging the entire economy, as happened in other Asian countries, most spectacularly in Indonesia in 1998,” Josh Felman, India’s former head of the International Monetary Fund, told the BBC.

In a February column for Project Syndicate, economist Nuriel Rubini also expressed concern about India’s economic model of giving control to a few “national champions” or “large private oligopolistic conglomerates” over significant parts of the economy.

“These conglomerates have been able to capture policymaking for their own benefit,” Mr. Roubini wrote. That phenomenon stifled innovation and made it impossible for start-ups and other domestic participants to enter key industries, he said.

India’s policy of creating “national champions” is similar to that adopted by China, Indonesia and especially South Korea in the 1990s, where a group of mostly family-owned business conglomerates – called chaebols, of which smartphone giant Samsung is the most prominent example – dominated its economy.

But unlike India, these countries “have not protected their conglomerates with high tariffs”, says Mr Acharya. India, however, is becoming increasingly protectionist to “insulate domestic industries and conglomerates from global competition,” Roubini wrote.

According to Mr Acharya and Mr Roubini, India needs to reduce tariffs to become more globally competitive and take advantage of the “China plus one” trend where supply chains are moving away from mainland China to geographies such as India and Vietnam.

India’s industrial concentration could also have domestic consequences – the growing market power of the “big five” may be one of the factors contributing to persistently high core inflation, or rising prices of goods and services other than food and energy.

“While a deeper and more complete examination is warranted, we find that there is a potentially causal relationship between market power and margins,” writes Mr. Acharya, adding that these companies are able to “exercise extraordinary pricing power and capture economic rents relative to other firms in the industry”.

But other economists told the BBC they were skeptical of this correlation.

“If a ‘big five’ firm enters a new sector, the group may become larger, but competition in that particular sector may increase and prices may fall. The most spectacular example of this dynamic occurred when Reliance decided to launch [telecom company] Jio: Telecom prices have fallen,” says Felman.

Madan Sabnavis, chief economist at the Bank of Baroda, says there is “not enough evidence” to support this thesis.

According to him, even in markets dominated by a small number of companies, such as airlines – where most of these conglomerates are not present – prices are consistently high.

He adds that even the sectors that feed on base inflation at the consumer level – recreation, education, health, household goods, consumer care – do not have the presence of the Big Five.

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