S Murlidharan

Against ‘demergers’— of States and companies

S. MURLIDHARAN | Updated on March 12, 2018

Decentralisation of political power can negate the breakaway itch. The other day, K. T. Rama Rao of Telangana Rashtra Samithi (TRS) said Telangana stands apart from demands from other States for statehood.

The other day, K. T. Rama Rao of Telangana Rashtra Samithi (TRS) said Telangana stands apart from demands from other States for statehood. Telangana was a separate State before it merged with Andhra Pradesh and, therefore, what is being attempted now is only a demerger.

He quite inaccurately used the term ‘demerger’ to mean reversal of merger, whereas in company law lingo, it means converting a division or unit of a company into a separate company. The newly created company will no longer be an appendage of the company it belonged to as a division. The parting of ways by Ambani brothers and carving out their own truncated empires is a case of demerger.

Spinning off of a division into a separate company has several things going for it, the enthusiasts would say. Each company would now focus on its core area of operation in keeping with the core competence theory, away from the clutter of too many unrelated products and services, they gush. The market also rewards such companies with greater valuations, hitherto thwarted by what is known as ‘conglomerate discount’ — punishment for fiddling with or dabbling in unrelated products and services — they claim.

Diversification pays

In their obsession with core competence theory, they ignore the downside and the main advantage of diversification, which consists in hedging one’s bets with more than one area of operation. Furthermore, in India, as indeed elsewhere, demerger has often only been a fig leaf for capitulating to the empire-building ambitions of feuding members of family-controlled companies. Reliance watchers wistfully say even today that the late Dhirubhai would have squirmed uncomfortably in his grave at the demerger in 2005 of his creation, given the fact that the combined entity would have taken the brothers closer to realising his ambition of Reliance being a Fortune 500 company. Be that as it may.

Carving out of States from larger States obviously has all the advantages of core competence, the point the advocates of smaller States don’t tire of making. Vidharba, for example, they say is far removed from Mumbai and, hence, it is neglected. Out of sight means out of mind, is their refrain.

The US is cited as an example to bolster their point. The US, they aver, has 50 states even though it has a population of just a third of India’s. They however forget that the size of the US in terms of area is almost twice as large as India’s and, therefore, the US is a bad example. In any case, if too much is set store by smallness, each district may have to be converted into a state which, of course, would be ridiculous.

Politicians’ motive

Like the squabbling members of a family-controlled company, politicians too want creation of smaller states with a selfish motive — creation of a mini empire where their writ would run; where they would stand out and not be subsumed by an overweening State satrap. These wannabe smaller satraps refuse to swear by the aphorism that ‘if you cannot beat them, join them’. Instead, their mantra is if you cannot beat them, break away from them, and position yourself as an equal.

If you cannot be the shahenshah, at least be a Nawab is their implicit refrain. If you cannot rule the four divisions of a State, divide them into four and get to rule one of them. Indeed, a different kind of divide and rule policy than what was perfected by the British, born of the sobering and humbling realisation that if your area of influence is limited to your pocket borough, confine yourself to it.

The founder of TRS, Chandrasekhar Rao, knows this more than anyone else. The British version amounted to sowing seeds of dissension among those till now united, but the Indian version is born of pragmatism.

Narrow vision

While regionalism cannot be equated with separatism or sub-nationalism, it does weaken the nationalistic outlook for the nation in the long run, with the mushrooming regional parties looking at things strictly from their regional prism. And it is here that the comparison between the US and India becomes inappropriate. The US might have 50 states, but has just two political parties — Democrats and Republicans. The rash of political parties in India, many of them with a regional outlook, frustrates meaningful nation-wide reforms, besides making the smaller State, especially if it is endowed with natural resources, the plundering ground for the newly anointed satraps, if not his personal fief. That Madhu Koda of Jharkhand couldn’t wait to sign away (barter away) the State’s rich mineral resources for 30 pieces of silver, or mess of pottage if you like, during his short reign, tells its own story.

This is not to decry India’s federal structure. Given India’s size and diversity, it is not possible to embrace the unitary form of government, the British model. Haryana and Chhattisgarh are rightly cited as examples of smaller States performing better, thanks to their smallness.

A balance needs to be struck between giving a leg-up to potential fissiparous tendencies and the impossibility of ruling from a distance, oblivious of the ground realities. It is here that the importance of grassroots democracy cannot be overemphasised. Proper devolution of power and finance to the grassroots institutions of democracy is the key to ensuring that people do not get the parochial itch, while keeping them in the loop in the nation-building process. Just as a conglomerate company can be managed by devolving powers to product heads and making them profit-centres, political power along with financial powers should be made to percolate down to the panchayati level.

(The author is a New Delhi-based chartered accountant.)

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Published on August 14, 2013
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