The indulgent phase

It is often mistakenly believed that the defining characteristic of the reform process in the macro economic policy framework was the abolition of licensing controls on fresh capacity creation. In truth, the abolition of controls on issue of capital by enterprises is perhaps its most significant characteristic. For, even before the formal abolition of industrial licensing, the Indian industry enjoyed a fair measure of freedom in creating fresh capacities in manufacture.

Even in the mid-1980s, the policy framework had been liberalised enough to permit automatic expansion of licensed capacities by a fixed annual percentage. This was reinforced by a concept of `broad-banding' of licences — a flexibility that permitted companies a wide latitude in what they could manufacture. A commercial vehicle manufacturer was atuomatiocally entitled to make more trucks or branch off into making cars. But in the absence of freedom to issue capital or price it appropriate to the stock market conditions prevailing or for that matter, access external sources of capital, the freedom to expand manufacturing capacity meant little.

In the event, the abolition of the law on control of capital issues — a law that conferred on the government the right to decide if companies should be allowed to issue capital or the price at which it would be marketed to the public if permitted etc. — marked an epochal event in the evolution of organised corporate sector.

This decision set off one of the worst forms of corporate excesses from a minority shareholder perspective. This phase saw many listed corporate entities conferring largesse on their promoter groups by issuing them shares at a steep discount to the prevailing market prices. The Government turned a blind eye to such goigs-on in the name of corporate democracy.

While the Indian affiliates of multinational corporations may have been the most visible practitioners of this chicanery, home-grown enterprises too were not far behind. In fact, practically all the major domestic companies resorted to it during the period that such freedom (to issue shares to promoters at a discount) was available. That brand of corporate excess was finally ended when the market regulator stepped in with the stipulation that preferential offers should be at prices aligned to the prevailing market prices.

But the corporate sector's penchant for excesses was by no means exhausted. The period also saw it indulging in mindless expansion into related and unrelated areas. The Central Statistical Organisation (CSO) estimates that the private corporate sector added on an average some Rs 73,000 crore in asset base in the first five years of the reform period. This is nearly four and a half times the average growth in the 1980s.

Clearly, the freedom to access external capital — a feature of liberalisation — did help. The belief that with the Government, now having got off the backs of domestic enterprises, there really was nothing to stop them from growing in strength helped boost stock market sentiment among investors. But such a sentiment would not have survived in the absence of tangible evidence of rise in equity values. Since this coincided with international investors believing that India was the place to be in, their interest in domestic equity provided the spark for a flare up in equity values. The process was helped along by domestic entrepreneurs indulging in a bit of artificial boost to the sentiment as they were busily raised money from overseas investors on the strength of a manipulated valuation in the domestic bourses. A permissive atmosphere that prevailed in nation's stock markets made all this possible.

The years of struggle

The party that began in mid-1991 lasted all of five years. It was payback time thereafter as companies suffered the debilitating consequences of the twin forces acting on it at that time.

There was the investor disenchantment from earlier decisions that led promoter-enrichment and poor profitability from a competitive environment that had greatly intensified with the entry of newer domestic and overseas players. The flames of investor anger and the searing heat of competition devoured many but those that survived emerged stronger.

The industrial output net of unorganised sector manufacture (a useful proxy for corporate sector output) grew annually by only 11.1 per cent during 1996-2001. In contrast the growth in the first five years of reforms was a healthy 16.6 per cent. The decline in net value added in the second half was due in part to the price pressure that operated on domestic enterprises during this period.

Incremental investments in new capacities in the later years was also not generating as much additional output as they did in the initial years of reforms. In 1994-95, the best year for the corporate sector, a rupee of additional output could be secured by an incremental investment of only Rs.1.61 while in 1999-00 it needed as much Rs 3.76 in fresh investments for the same one rupee of additional output.

The dawn of a new era

But signs of a turnaround in fortunes have begun to manifest as industrial output staged a smart recovery with 9 per cent growth in 2002-03. This comes on top of a 6.25 per cent growth the previous year.

Capital efficiency too has improved, as it needed only Rs 2.50 of fresh investments for generating a rupee of additional output. The process of recovery in the corporate sector is well and truly on and companies look set to capitalise on it for quite some time to come.

The India Inc story so far has revealed quite a few winners. Equally, there have been countless losers too, most notably from among the vast army of small investors who have were taken in by stories of quick fortunes in the stock market. Unfortunate as that may be, the India's development story pretty much reflects global experience in this regard.

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