The Financial Express
The growing footprint of the ‘Big-5’ industrial conglomerates in India appears to be feeding directly into keeping prices at a high level, said former Reserve Bank of India (RBI) deputy governor Viral Acharya, calling for breaking up of large industrial firms and their monopolies or oligopolies. The Big-5 corporates are: Reliance Group, Tata Group, Aditya Birla Group, Adani Group and Bharti Telecom.
“Whether done surgically or gracefully, it would be better to make India more competition friendly and less incumbent, especially less conglomerate, friendly. A significant benefit would be that even if the sub-groups remain among the largest companies in their respective sectors, they may lack the pricing power commanded by Big-5,” Acharya said in a paper published for the Brookings Institutions, titled ‘India at 75: Replete with Contradictions, Brimming with Opportunities, Saddled with Challenges’.
Acharya said the pricing power and overall market share of top five conglomerates in sales and assets have significantly risen over the last decade. “…private Top-5 groups evolved into the overall Top-5 across many non-financial sectors. At a disaggregated sectoral level too, the notable shift occurs around 2015-16 in several sectors, mostly traditional or capital-intensive… but recently, also in newer sectors such as telecommunications,” he said.
Starting in 2015, the Big-5 groups started acquiring larger share within the sectors where they were present. In particular, their 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 corporates groups fell from 18% in 1992 to less than 9%. “In other words, Big-5 grew not just at the expense of the smallest firms, but also of the next largest firms,” he said.
The growth of Big-5 conglomerates also appears to be driven partially by mergers and acquisitions (M&A), Acharya said. 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. “Importantly, given high tariffs, Big-5 groups do not have to compete with international peers in many sectors where they are present and derive most of their revenues domestically,” he added.
So how does India go ahead to carry this massive task? As per Acharya, “One way out of their breadth of presence is the good old Theodore-Roosevelt or William-Howard-Taft style “trust buster” strategy of simply breaking up large industrial firms and their monopolies or oligopolies by regulatory fiat or via Competition Commission diktat.” This dismantling of large corporates has been done repeatedly in the US, Acharya said, when concentration of corporate power rose nationally in a sector or across different product lines.
An alternative route would be to “throw sand in the wheels” by making it economically unattractive to remain a large conglomerate unless productivity gains are truly large. As the Big-5 have grown their market share over the past decade by M&As, it could be required that they own more equity of the companies they acquire, for example at least 80% or higher as in the US.
Acharya, currently a professor of economics in the Department of Finance at New York University Stern School of Business, served as the deputy governor of the RBI between January 2017 and July 2019. His speeches while at the RBI were released in the form of a book — Quest for Restoring Financial Stability in India.
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