India should dismantle its large conglomerates to increase competition and reduce their ability to charge higher prices, former Reserve Bank of India deputy governor Viral Acharya has argued in a new paper for the Brookings Institution, an American research group. However, Madan Sabnavis, chief economist at Bank of Baroda, says there isn’t “enough evidence” to support this thesis. He says that the sectors that feed into core inflation at the consumer level—recreation, education, health, household goods, and consumer care—don’t have the presence of the big conglomerates.
In a February column, the economist Nouriel Roubini also expressed concerns about India’s economic model of giving a few “national champions” or “large private oligopolistic conglomerates” control over significant parts of the economy. “These conglomerates have been able to capture policymaking to benefit themselves,” wrote Roubini.
According to Acharya, the “big five” conglomerates—the Reliance Group, Adani Group, Tata Group, Aditya Birla Group, and Bharti Airtel—”grew not just at the expense of the smallest firms but also of the next largest firms.” The deteriorating share prices of midcap and smallcap companies are a clear indication that the small companies are facing severe stress in terms of their revenue and profit growth.
The argument that big companies fuel inflation may be unsubstantiated. However, if a handful of oligarchs control about a quarter of India’s economy, it is susceptible to the risks of crony capitalists controlling the levers of power in policymaking, the bureaucracy, and the economy. This can only put our cherished values of inclusive growth, democracy, and liberty in peril.
A disproportionate share of bank loans (which are essentially public money) funds the organic and inorganic growth of a few conglomerates instead of bankrolling common prosperity. A case in point is the huge loans given by the State Bank of India (SBI) to the Adani Group. SBI has given loans totaling up to Rs 27,000 crore to companies in the Adani conglomerate.
These mammoth loans given to Adani Group companies account for about 1% of the total loan book of a bank as large as SBI. The second-largest PSU bank, Punjab National Bank (PNB), has sanctioned another Rs 7,000 crore in loans to the Adani Group companies. Moreover, LIC has invested huge amounts in Adani’s stock. Such huge bank loans could have funded a million dreams instead of just funding the large-scale acquisition of assets by a single corporate group!
Conglomerates also enhance the credit risk for banks due to their concentrated portfolios. Credit rating agency CreditSights, in its last September report, had put the spotlight on the Adani Group’s “elevated” leverage.
The regulators are assuming that the corporate governance of large conglomerates is good until all hell breaks loose. The regulators are seemingly overawed by the might of the big conglomerates. Everything was fine with the Adani Group companies until one fine morning in January, when US investment firm Hindenburg Research claimed the conglomerate had engaged in a “brazen stock manipulation and accounting fraud scheme over the course of decades”.
From the late 19th to the early 20th century, the three American monopolies (Andrew Carnegie’s Steel Company, now US Steel, John D Rockfeller’s Standard Oil Company, and the American Tobacco Company) maintained singular control over the supply of their respective commodities in the US economy. The passage of the Sherman Anti-Trust Act in 1890 eventually saw major US monopolies, such as Standard Oil and American Tobacco, break up. AT&T, once deemed a monopoly, was forced by the US government to spin off most of its assets. The danger of concentrated corporate power was as true in the 1890s, when railroad and financial barons were first consolidating power, as it is today.
China’s Alibaba Group now plans to split its empire into six main units covering everything from e-commerce to cloud computing in the biggest restructuring of its 24-year history. The Chinese government is clearly not comfortable with the growing clout of monopolies. The recent collapse of the 168-year-old, storied Swiss banking behemoth Credit Suisse has demonstrated the risks of “too big to fail”, putting the entire Swiss economy and financial system at risk. The Swiss government was compelled to broker a merger with UBS overnight!
American economist Milton Friedman once said, “The essence of an effective television industry, an effective telephone industry, an effective computer industry, or an effective mail delivery industry—you name it—is competition.”
For neoliberals, competitive markets are equivalent to democracy. Monopolies symbolise one-party rule!
(The writer is a retired
corporate professional.)