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COMMENT
Were There Any Reforms?
The oligopoly in banking has made it difficult for new firms to enter industry, and sustained the old guard
ASHOK V. DESAI
20 June 2009
It is a part of Indian legend that Manmohan Singh carried out reforms in 1991, and transformed the Indian economy from a dysfunctional socialist one to a dynamic capitalist one. Is this really true? I have been disappointed by the transformation of the first edition of Manmohan Singh, whom I admired, to the current edition of Manmohan Singh, the ruthless vote buyer with little regard for the future of the country. But I had no reason to doubt his credentials as a reformer in the first edition. Dany Rodrik and Arvind Subramanian have been making waves with the assertion that the economy started showing dynamism in the 1980s, a change that could be attributed to the liberalization of the late 1970s (see their version in the 2005 IMF Staff Papers). That raised doubts, but I suppressed them. But if the proof of the pudding is in the eating, the proof of reforms is in the transformation. If Rodrik and Subramanian advanced the date of the transformation, now two young women have denied the transformation. And if the Indian economy is still the same old bullock cart, maybe the great reforms were just window dressing undertaken to get IMF and World Bank loans, and the change of socialist heart was just a show. Such is the message of a paper Laura Alfaro and Anusha Chari presented in the last India Policy Forum.
Before 1991, Indian industry was dominated by entities that were at various times called managing agents, promoters and business houses among industries where they were allowed to operate, and by government enterprises where the government had twisted the rules to give them an upper hand. Either way, industry was characterized by oligopoly and privileged access. Then in 1991, Amar Nath Verma, secretary of the ministry of industries, and Rakesh Mohan, economic adviser in the ministry, made a bonfire of industrial licensing: the ministry abolished industrial licensing in all except 17 industries and public sector monopoly in all except eight. We would have expected that with delicensing, the share of the oligopolists, public as well as private, would go down and the share of new or smaller firms would go up.
Well, that happened, to some extent. The share of oligopolists — government firms and business houses — in the CMIE sample of 17,000 companies went down from 92 to 81 per cent in terms of assets, 82 to 76 per cent in terms of sales and 88 to 82 per cent in terms of profits between 1988-90 and 2000-07; correspondingly, the share of non-business-house private firms and foreign firms went up from 8 to 16 per cent in terms of assets, 18 to 24 per cent in terms of sales and 12 to 18 per cent in terms of profits. These were significant changes, but not earth-shaking. Amongst the latter, Indian firms’ share went up from 3 to 9 per cent in assets, 7 to 14 per cent in sales and 4 to 9 per cent in profits. The share of foreign firms remained more or less the same. The licensing mechanism remains intact for foreign firms; they still have to go to Foreign Investment Promotion Board for smallest things.
However, these figures conceal what happened in various industries. The share of foreign firms increased from 1 to 14 per cent in transport (read automobiles), 5 to 16 per cent in IT, 4 to 8 per cent in communications (read telephones), and 0 to 6 per cent in hotels; where FIPB let them invest, foreign firms did invest. But the licensing machinery is what limited foreign investment in India to a tenth of what it was in China. Non-business-house Indian firms increased their share in financial services from 1 to 22 per cent, in communications from 7 to 25 per cent and IT from 14 to 28 per cent.
Manufacturing dominates corporate enterprise; its share in corporate sales was 65 per cent in 2001-07. It is more profitable than other sectors; its rate of profit on assets was 50 per cent above average in 1988-90 and 40 per cent above in 2001-07. This is the sector that public enterprises and business houses continue to dominate with over three-quarters market share. It is the one that other firms have been least able to penetrate, despite industrial delicensing and despite a considerable fall in import duties. Their dominance would be less pronounced and would have declined more in terms of demand (that is, domestic production plus imports) than of production, but it would still be considerable. It has much to do with an oligopolistic financial sector dominated by government banks and its ties with public enterprises and business houses; lack of competition in finance is behind India’s poor manufacturing performance.
The author is Consultant Editor of Businessworld.
ashok dot desai at gmail dot com
(Businessworld Issue Dated 23-29 June 2009) |
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