Break up Big-5, Reduce Tariffs, Bring IBC Back on Track: What All Viral Acharya Said in New Paper

The former RBI deputy governor said that the growth of the Big-5, supported by a 'new India' policy of creating 'national champions', appears to be keeping prices at a high level. However, some experts disagree.

New Delhi: Former Reserve Bank of India deputy governor Viral Acharya has said that India should dismantle the largest conglomerates, or the ‘Big 5’, to increase competition and to reduce their pricing power.

However, some experts have disagreed that big conglomerates affect competition and increase prices of goods and services.

Industrial concentration

In a new paper for Brookings Institution, an American research group, Acharya, said: Until 2010, the Big-5 increased their footprint in more and more industrial sectors, broadening their reach to 40 NIC-2-digit [national industrial classification] non-financial sectors. After this breadth-first strategy came the depth-next strategy. Starting in 2015, the Big-5 started acquiring larger and larger share within the sectors where they were present.”

He added that the Big-5’s “share in total assets of the non-financial sectors rose from 10% in 1991 to nearly 18% in 2021, whereas the share of the next big five (Big 6-10) business groups fell from 18% in 1992 to less than 9%”.

The Big-5 are Reliance Group (owned by Mukesh Ambani), Tata Group, Aditya Birla Group, Adani Group, and Bharti Telecom.

This growth, he said, is supported by conscious industrial policy of creating “national champions” via preferential allocation of projects. 

Josh Felman, former India head of the International Monetary Fund, told the BBC, “National champions can easily become overleveraged and collapse, severely damaging the overall economy, as has occurred in other Asian countries, most spectacularly Indonesia in 1998.”

Economist Nouriel Roubini had also expressed concerns about India’s economic model of giving a few “national champions” control over significant parts of the economy.

He wrote in Project Syndicate: “The dark side of this system is that these conglomerates have been able to capture policymaking to benefit themselves. This has had two broad, harmful effects: it is stifling innovation and effectively killing early-stage startups and domestic entrants in key industries; and it is changing the government’s “Make in India” programme into a counterproductive, protectionist scheme.”

Last month, while speaking at the NSE-NYU conference on Indian Financial Markets, Acharya had raised concerns over the Big 5 companies that are becoming larger and larger and might be seen as too big to fail in credit allocations by banks and bond markets. “…they might be becoming so large that it becomes very hard to understand their related party transactions,” he had said.

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In the Brookings paper titled ‘India at 75: Replete With Contradictions, Brimming With Opportunities, Saddled With Challenges’, published on March 30, he added that the Big-5 have grown their market share by increasing their footprint in M&As.

“Even though the aggregate number of M&A deals has dropped since 2011, the share of M&A deals by the Big-5 has doubled from under 3% in 2015 to 6% in 2021, without such an increase being seen in the next five biggest groups,” he explained, with the help of a chart. 

Credit: Brookings paper on economic activity by Viral Acharya.

High core inflation

In his paper, Acharya, who is currently professor of Economics at NYU Stern School of Business, US, argued that the creation of ‘national champions’, or those with rising market power, or the “Big-5”, appear to be feeding directly into keeping prices at a high level. With this, it’s possible that it’s leading to persistently high core inflation.

“It is the Big-5 which are able to exert extraordinary pricing power and capture economic rents relative to other firms in the industry, whereas Top-5 but non-Big-5 firms in a sector are not associated with such an outcome in markups,” he added.

“While a deeper and fuller inquiry is warranted, we find that there is a potentially causal link from market power to markups,” he further said.

However, Felman told BBC, “If a ‘big five’ firm enters a new sector, the group may become bigger, but competition in that specific sector may increase and prices might actually fall. A most spectacular example of this dynamic occurred when Reliance decided to start [telecom company] Jio: telecom prices crashed.”

But this Scroll article explained that Jio’s rock-bottom prices was made possible due to a combination of factors: deep pockets of parent company Reliance Industries, lower operation costs because they only provided 4G, and favourable rulings.

Comparing Jio’s growth with Vodafone and Airtel is like comparing apples and oranges, a telecom reporter had told me, because the former started with only 4G.

In fact, a 2019 Mint article on how a ‘predatory pricing win turned out to be a double-edged sword’ for Airtel and Vodafone quoted Mahesh Uppal, director at communications consulting firm ComFirst India, as saying that Reliance is “strong enough to take a short-term hit and would not let incumbents even come up for air. Incumbents are witnessing tough times and need to look at different revenue streams”.

Separately, Madan Sabnavis, chief economist at Bank of Baroda, also told BBC that he doesn’t support Acharya’s thesis. He said that “even in markets dominated by a small number of firms, such as airlines – where most of these conglomerates do not have a presence – prices have consistently been high.”

He added that the sectors that feed into core inflation at the consumer level – recreation, education, health, household goods, consumer care – don’t have the presence of the big five either.

Also read: Five Issues That Are Hurting the Indian Economy

Reduce tariffs

The former RBI deputy governor said that to take advantage of the “China plus one” trend, India needs to reduce its tariffs and reduce protectionism.

(‘China plus one’ strategy is avoiding investing solely in China and diversifying business into other countries like India and Vietnam.)

High tariffs is one of the challenges, apart from the industrial concentration of the Big-5, that is keeping India from achieving high levels of consistent growth.

Acharya mentioned that “India is protectionist in precisely those sectors, viz. goods manufacturing, where the China+1 opportunity arises.”

“As per World Trade Organization records, India’s average present tariff rate of greater than 15% (18.3% in 2021) is the fourth highest behind Sudan, Egypt and Venezuela, on par with Brazil, and substantially higher than China and Mexico. While India’s tariff rate has no doubt come down from being above 50% prior to 1991, it has had no substantial decline since the global financial crisis of 2007-09, and has in fact increased by about 5% since 2013,” he said in his report.

He further said that while India has become more self-reliant on agricultural output, tariffs in this sector remain above 35%, but efficiency is low. For employing more than 40% of India’s workforce, agriculture generates less than 15% of the GDP. This prevents a market-based rotation of jobs in India from low-skilled agricultural labour to high-skilled services labour.”

Secondly, it’s important to note that high imports duties on raw materials are counterproductive to the manufacturing ambitions of this country, experts had told the Economic Times before this year’s budget.

Acharya, in the paper, said that “high tariffs – by increasing the cost of imports – have made exported goods by Indian firms costly and globally uncompetitive, lowering India’s goods exports.”

According to commerce ministry estimates, India’s goods exports were down 8.8% in February to $33.9 billion. They were down by 11.6% in October 2022 and 3% in December 2022.

He explained another point that high tariffs imply that Indians pay much more on many imported items (such as iPhones) than foreign consumers do. An iPhone is much costlier in India as compared to other regions like the UK, China, and the UAE.

So, therefore, “price levels in the economy are kept artificially high in spite of global efficiency gains that could potentially aid disinflation,” the report said.

And finally, he added, tariffs have created protectionism in several Indian industries, disincentivising investments (in efficiency) by cozy incumbents and allowing them to steadily garner market power by building up concentrated positions.

Get IBC back on track

The former RBI deputy governor said that to ensure industrial balance, India should ensure that “the bankruptcy code is ready to deal with large conglomerate defaults should they materialise”.

While the deterrence effect of IBC is well at work, the progress of the cases through bankruptcy is slow which adds to substantial erosion of asset and franchise values of defaulted companies,” he said.

He pointed out that “the present average of resolution times which is close to 18-24 months seems appropriate only for the largest of the cases and in difficult economic times. Most other cases should resolve much faster. One possibility is that many small and frivolous bankruptcies can be resolved privately outside of the IBC to prevent choking of the pipeline of cases.”