By N Chandra Mohan

The top priority of the incoming government must be to facilitate a virtuous cycle of private sector investment-led growth. This is an unfinished agenda of the last five years. Despite a strong public capex push, corporate investments have not crowded in to drive the process of overall economic expansion, which hit 8.2% in FY24. To be sure, leading family-run conglomerates have been making big-ticket investments but a broader private capex upswing has not kicked in. The significant concentration of new investments by only a handful of big players cannot fast-track India’s growth beyond the short term. There is a need for more participation from India Inc, whose entrepreneurial spirits have been dampened to undertake capacity expansion.

While conglomerates ramp up their investments, other domestic firms are hesitant to invest despite regular exhortations from the highest levels of the government. A focus on capacity utilisation offers valuable clues in this regard. While these are higher at 75-80% levels for companies in steel, cement, automobiles, and chemicals as demand has improved, the overall capacity utilisation rates are not so assuring. Although they improved from the Covid-related lows of 47.3% during Q1 FY21 to hit a high of 76.3% in Q4 FY23, it subsequently fell to 74.7% in Q3 FY24, according to the Reserve Bank of India (RBI) . Unless demand for manufacturing goods improves, average utilisation rates will not improve to a point where private industry requires additional capacity.

Like elsewhere in the US and Japan, there is no doubt that the dominance of very large companies or conglomerates has been rapidly growing in the economy. The trend of industrial consolidation has proceeded apace, with many sectors being taken over by fewer and bigger entities. This is evident in telecom, airlines, steel, cement, aluminium, synthetic fibres, polymers, paints, cars, trucks, two-wheelers, tractors, tyres, consumer electronics and electricals, toiletries, and even biscuits. The country’s 20 biggest firms now generate 80% of profits generated by the economy, which is twice what it was a decade ago, according to Mumbai-based fund manager Marcellus, which highlighted in detail the growing concentration of investments and profits.

Conglomerate capitalism discourages innovation, widens income disparities, and slows growth over the long term. These big players also use their pricing power, which is one of the factors that can drive inflation in the economy. The dark side of this path of development is reflected in the sharp rise in big-ticket corruption after reforms were implemented since 1991, which upsets even the ardent advocates of liberalisation. Conglomerates historically have had a close relationship with the Indian State, notwithstanding the churn in their ranks over the years. This is largely responsible for their investments in line with the government’s economic policy priorities. Not surprisingly, they view their ambitious capex plans as contributing to nation-building.

For such reasons, India must not let a handful of tycoons and conglomerates to “define its destiny”, argued Uday Kotak, who founded one of the India’s largest private sector banks. He accordingly urged the country to aim for broader growth with many “winners” or “encouraging many flowers to bloom” in an interview to the Financial Times. These comments also resonate with development economists, who have drawn parallels between the dominance of conglomerates across vast swathes of the economy and the chaebol-dominated South Korean economy. Such a development strategy reduces the space for small and medium businesses to grow into larger firms and contribute to a more broad-based growth process.

The big question is: How can all of this change for “many flowers to bloom”? In other words, how can a version of capitalism take root in the country that is more competitive than conglomerate-oriented? Free and fair markets are a must, and the policy of the incoming government must address this to widen the pool of competition. The process of creative destruction must be allowed, whereby small and new firms have a chance to disrupt the existing concentration of significant business power of the handful of conglomerates. A trust-buster strategy recommended by a former RBI Deputy Governor, Viral Acharya, for breaking up large conglomerates by regulatory fiat or  competition commission diktat, deserves attention. There is clearly a need for greater checks and balances through regulatory agencies having the authority to intervene, if necessary, to check market abuses and anti-competitive behaviour.

In this milieu, triggering a private capex upswing to drive the India growth story also entails addressing the serious difficulties in doing business on the ground, especially in various states. The incoming government must implement deep-rooted structural reforms to free up the land and labour markets. Problems of land acquisition have bedevilled many investment projects. Domestic small and medium businesses, for their part, are struggling to cope with labour law requirements and predations of the inspector raj. Rather than aspiring to break into the top 50 countries on the ease of doing business indicators, it is these structural economic reforms that are needed to kick-start more private sector investments. India Inc’s animal spirits then are bound to be rekindled to broaden and drive the pace of economic expansion.

The author is an economics and business commentator based in New Delhi

Views are personal