Former Deputy Governor of Reserve Bank of India Viral Acharya has suggested that the top five Indian conglomerates, including Mukesh Ambani-backed Reliance group, Tata Group, Aditya Birla Group, Adani Group, and Bharti Telecom should be dismantled as their market dominance could be responsible for keeping core inflation persistently at a high level.

Acharya wrote in a paper to be presented at a Brookings Institute panel on emerging markets that these conglomerates have grown at the expense of smaller local firms. At the same time, the government’s “sky-high tariffs” have shielded these conglomerates from the competition from foreign firms.

‘Trust buster’ strategy

“One way out of their breadth of presence is the good old Theodore-Roosevelt or William-Howard-Taft style “trust buster” strategy of simply breaking up large industrial firms and their monopolies or oligopolies by regulatory fiat or via competition commission diktat,” Acharya said.

“An alternative route would be to throw sand in the wheels by making it economically unattractive to remain a large conglomerate unless productivity gains are truly large,” he added.

In summary, he wrote, creating national champions, which is considered by many as the industrial policy of “new India”, appears to be feeding directly into keeping prices at a high level, with the possibility that it is feeding “core” inflation’s persistently high level.

While countries like Korea also had the national-champion policy where large conglomerate groups such as Hyundai and Samsung have become significant international players in several sectors, there are at least two critical differences when it comes to India. First, these countries did not protect their conglomerates with sky-high tariffs as India does. That is, their conglomerates were competing on a much greater level playing field with international peers.

“In contrast, barring the exception of tech service exports, most of the Big-5 revenues in India are domestically sourced, and barring the exception of e-commerce, without much foreign competition. Secondly, these countries undertook a series of supply-side or factor-market reforms in land, labor, power, and financial sector, among others. While India’s financial sector has been restored to reasonable stability, critical reforms in land, labor and power are either wanting or far from maturity. At present, therefore, the rising industrial concentration in India presents more of a risk or a dark side through various,” Acharya said.

Other recommendations

The economist recommended four other things India should do to achieve its full potential including reducing tariffs to increase the country’s share of global goods trade and reduce protectionism; ensuring the bankruptcy code is ready to deal with large conglomerate defaults should they materialise; reducing fiscal deficits and public sector borrowing requirement as well as reining in inflation (especially the persistent core) closer to mandated targets, which would reduce external sector vulnerability and free up monetary policy from the specters of fiscal and dollar dominance; and addressing gaps in skilling and education, for example, by setting up charter schools and giving corporates incentives to improve women labor force participation.