Corporates' response to liberalisation

One cannot still put one's finger on the extent to which India Inc has made use of the business opportunities opened up following liberalisation in 1991. There has always been a gnawing but vague uneasiness felt by observers that India's corporates could have performed much better than has actually been the case.

This applies particularly in respect of rising to world-class standards, bringing big, novel and inventive ideas into play through a vigorous push in research and development, using high-end technology for product development, adhering to commitments regarding quality and delivery schedules, and conforming to the essential criteria of cost-effectiveness and total customer satisfaction.

To the best of my knowledge, there has been no in-depth study and documentation of these and other factors relevant to the theme of Indian corporates' response to liberalisation.

However, an indicator of their cumulative effect is provided by overall competitiveness in which, disappointingly, among 57 major countries, India has been ranked 30th in 2009 (against 33 in 2005 and 27 in 2006 and 2007) in the World Competitiveness Yearbook brought out by the International Institute for Management Development.

There is yet another standpoint from which the performance of India Inc after liberalisation can be viewed — by positing the question whether it has been conducive to generating and sustaining business dynamism, unleashing the talents and skills for creativity and innovation, or whether it has simply aggravated the inequalities across industries and helped dominant business houses further entrench themselves, and thereby manipulate market forces in unnatural and unwanted directions.

The answer provided for this question by the Working Paper No.11/8 published by the IMF on January 7 is absorbing and thorough. It takes the figures and sources of corporate profits as the yardstick, since they are both “a reward and spur to creative change that, in turn, creates wealth, trade and jobs for society” and “a product of the exercise of market power and influence”, while sources of profitability guide “the production, investment, innovation, market and lobbying strategies of firms”.

Disturbing feature

I am giving here the gist of only the more salient conclusions, leaving it to economic analysts and the federations of Indian chambers of commerce and industry to make a closer study of the paper.

The core finding is that India's economy, after all these years of liberalisation, is still dominated by the incumbents (state-owned firms and business groups) in terms of share of sales and assets.

A disturbing feature is the virtual cessation of entry of new stand-alone firms after the late 1990s, whereas it was substantial across all industries immediately following liberalisation.

On the other hand, significantly, there has been an increase of firms linked to business houses. There is still a tendency on the latter's part to get ahead, and acquire increased importance, not through competitive ability, but by means of market power and government-business relationships.

The paper warns that this, in turn, can lead to deepening inequality and concentration of personal wealth, reinforced by corporate influence over the state, creating a new corrupt environment and potentially sapping business energy, with adverse consequences for growth in the medium to long term.

In short, “while the overall assessment is … of a dynamic business sector, the results do caution that this process also shows signs that could change the direction of Indian corporate dynamics, especially with respect to the lack of entry in the 2000s and a reversal in the trend of declining concentration for some sectors.

“Further accentuation of these tendencies could create greater incentives for investment in entrenchment and a less dynamic corporate sector…. The striking dynamism in corporate profits and asset formation (after liberalisation) contrasts with a surely slower pace of change in the functioning of the state. How these differential speeds will eventually interact may well fashion the next phase of corporate evolution in India.”

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