Size matters: Industry must scale up

Kalyan Raipuria

The first 1,000 enterprises ranked recently by Asiaweek magazine for 2000-01 include only 20 companies from India. Out of this, only a third of them are from the private sector: Reliance Industries, Hindustan Lever, ITC, Tata group, L&T, Maruti and Grasim. It is the oil-sector public enterprises which have been ranked amongst the top: Indian Oil Corporation (34), Hindustan Petroleum (121) and Bharat Petroleum (130).

Globalisation need not endanger the Indian industry. It must grow in terms of competitiveness which today necessitates scaling up in terms of revenue, assets, capitalisation and profits. The overall results further indicate that India’s share in sales, assets and profits in total of 1,000 enterprises is just 1.6, 1.1 and 3.8 per cent compared to China’s 3.8, 6.6 and 12.3 per cent respectively. Among oil companies, only IOC ranks better than Petromine of Indonesia and Petronational of Malaysia. Reliance Industries has performed better at 209 compared to LG Chemicals at 273, but NTPC ranked at the 289 position is compared to S.Korea’s Electric Power at 64th position. The stunted growth of public enterprises is understandable in the era of liberalisation, reforms and privatisation as support for resources has declined while mobilisation through bonds cannot make quantum jumps in the present capital market conditions.

The opportunities for growth have indeed expanded after liberalisation and liquidity in the financial system is so high and interest rates have fallen. But the slowdown in the economy is not totally demand driven as the country’s per capita income has been growing at an average rate of 4.5 per cent during the last five years. Export demand if met with differentiated products in the value added spectrum can well complement the domestic demand for industrial products. With 0.7 percent share in world imports, the sky may not be the limit for Indian exporters even in times of lower growth in world imports.

Clearly, it is the scale of operations which is keeping the Indian industry at the lower ladder of competitiveness. Besides, it is also dependent on the core competence, human resource development, the management quality and brand name.

The crucial source of financing is internal generation as expected in new projects and as per performance in the existing units, internal generation always proves inadequate to finance large projects in any sector.

Examples of large scale funding for raising equity are not many. But Reliance has been a role model particularly when the primary market was booming. Other examples come from the banking and finance sectors, telecom, information technology and media sectors.

Presently such companies are reported to have huge cash reserves. Given huge funds with the banks and cash mounting with certain companies, new institutions and instruments have to be found out to increase the much needed mobilisation for large industrial projects which can be potential competitors at global level.

The financial institutions, existing and new, at central and state levels, should aim at a mobilisation of a total fund of about $ 10 bn a year, further expanding in course of the Tenth plan period. Equity financing of the above order should be considered feasible particularly in view of the domestic savings-led demand for equities and corporate mergers and acquisitions, besides, foreign instutional investment (FII) inflows.

The focus on infrastructure should continue, but can India’s competitiveness scale up without new investments in industry? In fact, the new investments must take into account the need to scale up units in sectors of India’s basic comparative cost advantage.
Further, has the IT revolution eroded the importance of scale and size of enterprises? Global connectivity does help reduce inventory and other costs, and increase sales through Internet. To the extent real economy remains unchanged in importance, in terms of content, a globally competitive minimum is essential. Liberalisation and reforms, have transferred so much decision making power for investments to individual entrepreneurs that their collective irrationality, reflected in ‘wait and watch’ syndrome and in shying from competition, can not be countered through the action of the State.

Private equity malaise shows shortcomings of the markets. When markets fail, strategic institutions have a crucial role, but not necessarily and directly by the State. The institutions can also help ’bottom up’ stock picking, as in China. Let tough times lead to planting the seeds of a number of competitive entrepreneurs.

(Dr Kalyan Raipuria is Economic Adviser, Ministry of Consumer Affairs, Food and Public Distribution. The views expressed are personal)