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The myth of liberalization?

The myth of liberalization?
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First Published: Sat, Oct 31 2009. 12 23 AM IST

Updated: Sat, Oct 31 2009. 12 23 AM IST
We all know the Indian corporate landscape has been transformed since liberalization. Indian companies have become more efficient, they have spread their operations around the world and their balance sheets have improved. But Laura Alfaro of Harvard Business School and Anusha Chari of the University of North Carolina at Chapel Hill cast a sceptical eye on that received wisdom. They have looked at firm-level data between 1988 and 2005, and argue that while there have undoubtedly been substantial changes, “on closer examination, what emerges is not a story of dramatic transformation in India’s microeconomic structure following liberalization. Rather, the data suggest an economy still dominated by the incumbents, state-owned firms, and to a lesser extent, the traditional private firms, that is, those firms that existed before the first wave of reforms. We find evidence of continuing incumbent control in terms of shares of assets, sales and profits accounted for by state-owned and traditional private firms... Interestingly, rates of return remain remarkably stable over time and show low dispersion across sectors and across ownership groups within sectors”. The researchers say that the shock of liberalization should have led to a Schumpeterian process of creative destruction and the replacement of old firms by new ones. But that didn’t happen in India and “sectors in which state-owned enterprises and older private firms dominated activity prior to liberalization continue to do so 20 years after the reforms began”.
Illustration: Jayachandran / Mint
Surely Alfaro and Chari are joking? If you consider industries such as telecom, information technology (IT), automobiles, consumer durables, real estate and media, to name just a few, some of the biggest firms in these sectors didn’t even exist in the 1980s. The researchers agree that an exception to their thesis is the growth of new private firms in the services sector. That leaves out telecom, IT and the media. But what about Maruti Suzuki India Ltd and Hero Honda Motors Ltd in the automobile segment, ICICI Bank Ltd in finance and the Korean firms in consumer durables? According to the researchers, the numbers prove their point. Between 1988 and 1990, on average, new private firms accounted for 26% of the total number of firms, a percentage that rose to 56% between 2003 and 2005. That’s a considerable increase and shows the easing of entry barriers. But here’s the rub: “Between 1988 and 1990, state-owned and traditional firms accounted for 94%, 87% and 91% of total assets, sales and profits. Between 2003 and 2005, these fractions stood at 77%, 73% and 78%, respectively.” That’s not too much of a change.
The authors point out that while the rising importance of foreign and private firm activity is evident, the incumbents from the pre-reform period control nearly three-quarters of the economy. There’s more: The authors say that the average total assets of state-owned firms represented close to 70% of total assets in 1988-1990 and stood at around 60% by 2005. That shows the state still dominates the corporate sector, at least in terms of assets.
So there has been change, but not a dramatic one. One reason could be the considerable government presence in sectors such as power, oil and gas and banking. Most of the big new entries have been in new industries, while established groups continued to dominate the older ones. The obvious conclusion: We need more reform. The authors point out that the continuing high levels of state ownership and ownership by traditional private firms in India “raise the question of whether existing resources could be allocated more efficiently and whether remaining barriers to competition jeopardize the effectiveness of reform measures that have been put in place”.
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First Published: Sat, Oct 31 2009. 12 23 AM IST