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 argued in a new paper for the Brookings Institution, an American research group.

According to Acharya, who is now an economics professor at NYU Stern, “industrial concentration” — which refers to the extent to which a smaller number of firms are responsible for a country’s overall output — declined sharply in India after 1991, when the country opened up its economy and state monopolies began to give up their market shares 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 total non-financial sector wealth rose from 10% in 1991 to almost 18% in 2021.

They “grew not only at the expense of the smallest, but also of the next largest companies,” says Mr. Acharya, because the share in the balance sheet total of the next five corporate groups halved from 18% to 9% in this period.

According to Mr Acharya, this could have been for many reasons – their ability to acquire large distressed companies, a growing appetite for mergers and acquisitions, and India’s deliberate industrial policy of “creating national champions through preferential allocation of projects and, in some cases, through regulatory agencies that turning a blind eye to competitive prices”.

The trend raises several concerns, according to the former deputy governor. These include “the risk of crony capitalism, i.e. political connections and inefficient project allocations, related party transactions within their Byzantine corporate organizational charts”, taking on excessive debt to finance their expansion and preventing competitors from entering the market.

Indeed, excessive leverage was one of the many red flags recently raised against the Adani group by US-based short seller Hindenburg Research. The report caused billions of dollars to be wiped from the stock market.

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

“National champions can easily become over-indebted and collapse, causing severe damage to the overall economy, as has happened in other Asian countries, most spectacularly Indonesia in 1998,” Josh Felman, former Indian head of the International Monetary Fund, told the BBC.

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

“These conglomerates were able to take advantage of policymaking,” wrote Mr. Roubini. The phenomenon is stifling innovation and barring the entry of start-ups and other domestic entrants into key industries, he said.

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

But unlike India, these countries “haven’t protected their conglomerates with sky-high tariffs,” Mr Acharya says. However, India has become more protectionist in an effort to “insulate domestic industries and conglomerates from global competition,” Mr Roubini wrote.

All of this has major implications for India’s attempts to become the world’s next factory.

According to both Mr. Acharya and Mr. Roubini, India needs to lower tariffs to become more globally competitive and capitalize on the “China plus one” trend, with supply chains shifting from mainland China to regions like India and Vietnam.

India’s industrial concentration could also have domestic implications – the rising market power of the ‘Big Five’ could be one contributor to persistently high core inflation or the rise in prices for goods and services other than food and energy.

“While a deeper and more complete investigation is warranted, we find that there is a potential causal link between market power and price premiums,” Mr. Acharya writes, adding that these companies are able to “exercise exceptional pricing power and generate economic returns.” compared to other companies in the industry”.

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

“When a ‘Big Five’ company enters a new sector, the group may grow, but competition in that specific sector may increase and prices may actually fall [telecom company] Jio: Telecom prices have plummeted,” says Mr. Felman.

Madan Sabnavis, chief economist at the Bank of Baroda, says there is “insufficient evidence” to support this thesis.

In his opinion, even in markets dominated by a small number of companies like airlines — where most of these conglomerates have no presence — prices have been consistently high.

He adds that the sectors that contribute to core inflation at the consumer level – leisure, education, healthcare, housewares, consumer care – are also not represented by the Big Five.

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