The 63rd anniversary of independent India is a good time to view the state of the country through the eyes of its companies, then and now, old and new.
Why should this way of looking at independent India be privileged over other narratives? After all, the received wisdom now is that post-1991, most—if not all—of the mistakes made during the socialist interlude from 1947 to 1980 were corrected. Today, the country believes in free markets, and state intervention in the economy is a fading reality. Well, think again. If old mistakes have been rectified, their lessons have been ignored and the government is busy making new mistakes.
The story begins with the 51 firms that were incorporated in 1947. As a Mint story on Saturday showed, many of these firms continue to exist (and thrive), while others have lost their original identities due to mergers, acquisitions and other reasons. A look at the list shows that many of these companies were involved in “low” innovation sectors such as textiles, mining, sugar and insurance. There is a sprinkling of light engineering firms too. At that stage of India’s development, this was considered normal.
Then, in the following years, something changed for the worse. The story is well known, but bears a short repetition. The government reserved large swathes of economic activity for the state sector. Research and development did not lead to new ideas being brought to the marketplace. Most firms in the private sector chased government licences and permits, and indulged in rent-seeking. Takeover battles over existing companies became the stuff of news. Product innovation, profits and productivity became bad words. An entire economic ecosystem had gone bad.
Economists argue that most well-performing economies have a mix of innovative and “replicative” entrepreneurs. The former create new products and bring them to the market. The latter, usually comprising established firms that have passed their innovative phase, refine and mass-produce these innovations. From 1947 to the 1980s, India’s economic environment was heavily skewed against the innovators. It was only in the mid-1980s that these mistakes were realized and some freedom permitted to private enterprise. The results were the innovation-oriented, knowledge-intensive firms that created new drugs, discovered new molecules and wrote innovative software.
Illustration: Shyamal Banerjee/Mint
As mentioned above, the story seems to stop there. It has actually been arrested there. Successive governments since then have made the same mistakes. When the state began its retreat, instead of letting innovative firms dominate the landscape, it allowed oligarchic firms, ones that made their fortunes in sectors that were once the preserve of the government, to become dominant. Take a look at sectors such as telecom, oil and gas, mining and, increasingly, infrastructure. Count the number of firms that offer innovative products, ones created by the ingenuity of these firms and not merely those not available in India before. Your count will be very low. Today, they dominate the Indian economic landscape. While the effects of this economic “takeover” are yet to be felt, it will certainly lead to a stifling of creativity. The last time it was at the hands of the government, this time it will be at the hands of private behemoths.
So this is the second time that a similar mistake will be repeated by the government. Once due to choking regulations and now due to corrupt and botched deregulation. The first time the mistake was made in innocence, in the false belief that the government could deliver what citizens needed. The second time, there is no innocence.
This poses a threat to economic growth. So far, by and large, India’s growth has been based on accumulation of resources. A high rate of savings has translated into capital accumulation. But as the Soviet and East Asian experience shows, this cannot go on. Sooner or later, better use of existing resources by increasing output per unit of resource input will be the key to sustained growth. This is where innovative entrepreneurship enters the equation. Unfortunately for the country, this is the missing element in our long-term growth equation.
The danger now is that India may take the East Asian route: A limited window of growth—one that is busted by cronyism and oligarchic capture. At the moment, the landscape has a sprinkling of innovative firms and big, non-innovative ones. But a close look shows that most innovative firms are located in a few sectors. In other words, there is an enclave-type development of these firms. What ought to be happening is their generalized spread all over the economy. This may or may not happen.
Perhaps it may be a bit late to prevent adversity from creeping in. The political system and the government, in turn, show no sign of appreciating the importance of well-designed deregulation and permitting strong and independent regulatory institutions to emerge. There simply is too much to be gained by cronyism and corrupt practices. Economists—and the government has plenty of bright ones—can only point the way. Someone else has to walk the path. There is no sign of that.
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