Why does this ex-deputy guv of RBI want India’s biggest firms dismantled?

By Anup Roy

India’s biggest conglomerates, which wield immense pricing power in the retail, resources and telecommunication sectors, are contributing to elevated inflation and should be broken up, a former central banker said.

The “Big 5” consisting of Reliance Group, Tata Group, Aditya Birla Group, Adani Group and Bharti Telecom have grown at the expense of smaller local firms, said Viral Acharya who was Reserve Bank of India deputy governor between 2017 and 2019. At the same time, the government’s “sky-high tariffs” have shielded these conglomerates from competition by foreign firms.

“Creating national champions, which is considered by many as the industrial policy of ‘new India,’ appears to be feeding directly into keeping prices at a high level,” said Acharya, who is a professor of economics at New York University Stern School.

He suggested such conglomerates should be dismantled to increase competition and reduce pricing power. If that doesn’t work, “throw sand in the wheels by making it economically unattractive to remain a large conglomerate unless productivity gains are truly large,” Acharya wrote in a paper to be presented at a Brookings Institute panel on emerging markets. 

Historically, India’s problem was considered to be the opposite — companies were too small and couldn’t emulate the productivity gains of big firms. 

Part of Acharya’s reasoning was that Indian consumers could not fully benefit from input price declines as the Big 5 companies control manufacturing of metals, coke, refined petroleum products as well as retail trade and telecommunications.

He said goods inflation remained high in India, even though globally it declined last year after supply-chain issues eased.

India’s elevated core inflation, which strips volatile food and fuel prices from the headline, has kept borrowing costs high. Even though the RBI’s mandate is focused on managing headline consumer prices, core inflation has made its way into policy deliberations. The indicator has stayed above 6% for 17 straight months.  

RBI Governor Shaktikanta Das cited a persistently high core indicator as the reason for not lowering his guard on inflation even after raising rates by 250 basis points since May. Economists expect the central bank to raise the policy rate once again next week.

Acharya, who had voted against Das on key policy rate decisions in the past, said India needs to restore macroeconomic balance. 

“The rising concentration of corporate power risks making inflation even more persistent and creating a vulnerability on external sector front given India’s outsized fiscal and cyclically sensitive current account deficits,” he said. 

Economists have said India’s current account deficit is expected to be below 3% of the gross domestic product for the fiscal year ending March, while the fiscal deficit will likely be 6.4% of GDP.

Acharya was regarded as one of the RBI’s most outspoken central bankers before he resigned in June 2019 — six months before his term ended. He had been a staunch defender of the central bank’s independence that culminated in a hard-hitting speech in 2018 and brought to light the tension between the government and the monetary rate setters at the time. 

“I do not have all the answers, but an open dialog around facts, opportunities and risks, to help India be a significant beneficiary in the China+1 transition of the global economy, would be useful all around,” he wrote in his paper. “Much is at stake, for India and the world. It would be nice if India can get it right in the coming decade.”