Business dynamism vs entrenchment advantage

Corporate profits generally make for happy tidings for investors, but a worrying question put forth by a paper in ‘ India Policy Forum 2010-11: Volume 7 ' from the National Council of Applied Economic Research and Brookings Institution (www.sagepublications.com) is whether the profits are from business dynamism or advantages of entrenchment.

Competing views

There are two competing views analysed by the essay's authors, Ashoka Mody, Anusha Nath, and Michael Walton.

One, that liberalisation fostered business dynamism through removal of entry barriers and competitive pressures, and therefore competitive capitalism has been the source of India's structural change and growth; and, two, that the forces of capitalism have generated incentives to accumulate excessive market power accompanied by economic entrenchment of the winning firms, in turn leading to deepening inequality and concentration of personal wealth.

Based on a study of the profitability of firms listed on the BSE, covering the period from the early 1990s to the late 2000s, the authors find a largely positive story for corporate expansion — that the corporate economy represented by the BSE firms looks more like an exemplar of dynamic, competitive capitalism than of concentrated market power and economic entrenchment, at least with respect to product markets.

The evidence is consistent with contrary tendencies, the authors add.

For instance, the robust process of new entry seems to have stopped and, there may well have been some increase in industry concentration in the 2000s, they note.

Other points include imperfections in domains outside product market structure, and widespread variation in the levels of efficiency in Indian corporate production processes.

The essay wraps up by underlining that the striking dynamism in corporate profits and asset formation in this period 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.”

Cost overruns

Another essay, in the volume edited by Suman Bery, Barry Bosworth, and Arvind Panagariya, is on cost overruns in public procurement of infrastructure (roads and railways).

The positive finding by the author Ram Singh is that since 1980s the delays and the cost overruns have declined, with the latter declining not only in absolute terms but also as a percentage of project cost.

But what can be disturbing is the U-shaped effect, what with the relatively big projects having much higher cost overruns compared to smaller ones, both in absolute and percentage terms.

In Singh's view, incompleteness of project designs and contracts may be one of the leading causes behind delays and cost overruns.

He cites MOSPI reports that highlight project scope as one of the most important and frequent reasons behind delays and cost overruns.

Another insight is that the traditionally-used IR (item-rate) contracts do not provide the right kind of incentives to make quality investment or avoid delays.

In contrast, says Singh, PPP contracts, by bundling the responsibility of maintenance with construction, motivate the contractor to desist from quality-shading efforts.

Though, in comparison to non-PPPs, PPP projects have experienced significantly higher cost overruns, the time overruns have been lower, informs the author.

He avers that, in view of the fact that delays are one of the leading causes behind cost overruns, the findings on PPP projects may have policy takeaways.

Recommended read for the research-oriented finance professionals.

High-decibel dreams

With Gujarat being in the news these days, it may be apt to read a chapter about the state in ‘ India's 2009 Elections: Coalition politics, party competition, and Congress continuity ' edited by Paul Wallace and Ramashray Roy (www.sagepublications.com).

The author Ghanshyam Shah traces how Narendra Modi became the Chief Minister of a state dominated by entrepreneurs.

“Mercantile and industrial capitalism has grown since the mid-19th century. Compound annual growth rate (CAGR) has gone up from 3.32 per cent in the 1960s to 4.88 per cent in the 1980s, and 5.53 per cent in the 1990s.”

As an example of infrastructure facilities built for attracting investment, he mentions the formation of Gujarat Export Corporation Ltd in 1965, and reminds that in the early 1990s, before structural change happened in the Indian economy, the state ranked next to Maharashtra in industrial growth.

“In the 1980s, the state aspired to become a mini Japan. It was the first in 1990 in announcing its new industrial policy.”

A section on ‘Development hype and governance' speaks of the many dreams sold by the CM.

Such as the release of water in 2005 from the Narmada dam into the dry Saraswati River in north Gujarat, touted as the mahasangam (grand union) of two holy rivers. “More than a thousand sadhus were brought to the function at state expense. The CM announced, ‘The resurrection of Saraswati will enrich the people of region.' But within a few months, ‘Narmada water… turned into a drainage line with sewage and waste being dumped on the bed by the municipality.' The flow of water discontinued because the municipality could not pay Rs 50 lakh a month for the pumping of the water.”

Another example given in the chapter is about the gas find in a well drilled by the state-owned Gujarat State Petrochemical in the Krishna-Godavari basin, when the CM went on to proclaim that the discovery was a mammoth 20 trillion cubic feet and would transform Gujarat.

“He told a gathering of farmers in north Gujarat that ‘very soon their farms will have oil wells, and every morning tankers would line up outside to collect crude!'”

Useful background material on a democracy in action at the regional level.

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