The animal spirits of the new entrepreneur

Indian Express, 30 August 2004

A grand theme of a well-functioning market economy is the ceaseless process of ‘creative destruction’, where firms and industries continually die, and others take their place. This is in contrast to a socialist, government-driven economy, where bureaucratic compulsions prevent death, and prevent dynamic upstarts from coming up. To what extent have the reforms of the 1990s changed Indian industry? Has the process of creative destruction become a predominant characteristic of the post-reform era?

At first blush, the answers are disappointing. The liberalisation of the economy has led to very high growth rates in the private sector. But one thing remains unchanged. PSUs still dominate the list of the top ten most profitable companies of India. In 1993, this list included NTPC, ONGC, IOC, IDBI, SAIL, Air India, Reliance, IRFC, Power Grid and HPCL. Apart from Reliance, the other nine were all PSUs. This was to be expected. The economy has been dominated by the public sector. All this is supposed to have changed ten years later. But if we look at the list of the top ten most profitable companies last year, in 2002-03, eight of them were still PSUs. This list consisted of ONGC, IOC, Reliance, NTPC, SBI, HLL, GAIL, HPCL, Nuclear Power Corporation and BSNL. Among the private participants, Reliance kept its position and HLL was the only one to join the list

Market capitalisation is a measure of the value of expected future profits. So, even if current profits are low but future profits are expected to be high, the market cap of a company is high. After the listing of TCS, the list of top ten companies in India, according to market capitalisation, is dominated by the private sector. From the PSUs, only three figure: ONGC, IOC and SBI. However, three major PSU IPOs could take place which would increase the presence of PSUs in this top ten list: BSNL, NTPC and Nuclear Power Corporation.

A remarkable dynamism is found in the top ten by market capitalisation. Eight of the ten names, as of August 25, were not on the list as of 10 years ago. The list is now dominated by new and dynamic companies. The high-technology companies—TCS, Infosys, Wipro and Bharti—are in the top 10 list by market capitalisation on the strength of their bright prospects. Very few countries can boast that four of their top 10 companies are dynamic new companies in new industries which are the creatures of the last decade.

These firms are not yet the biggest in terms of profits. Infosys made profits of only Rs 1,243 crore in 2003-04, Wipro had Rs 914 crore and Bharti was at Rs 0.4 crore. But expectations about future profit growth in this sector gives them higher market capitalisation than companies such as GAIL and HPCL, which have higher profits today. The technology sector is expected to see high growth and profits. These firms, with small profits but high market cap, reflect the success of a market that is willing to look beyond mechanical processing of past data. This is in contrast with banks, which have only delivered capital to past success, without an ability to do forward-looking analysis.

The list by market capitalisation for 1993 serves as a scrollkeeper of the giants of yesteryear who have been displaced by the upstarts:

SAIL, TISCO, TELCO, Hindalco, BPCL, L&T and Grasim have done badly in the last ten years. They were expected to do better than they would. Grasim has dropped the most, all the way from rank 9 to rank 26. This could happen to today’s list of top ten by market cap as well. Ten years later we could be looking at biotech companies, or sectors still unheard of, or a list of companies that have not been born yet. These could do well for a few years and then disappear.

Creative destruction is the hallmark of the market economy. Looking forward, the grave danger in economic policy is that of pressure in favour of protecting and favouring incumbents. If India is able to produce sound economic policy in the next 10 years, then eight of the top ten names that we see here should get displaced. If, instead, policies are biased to protect incumbents, then this process of creative destruction will be contaminated.

It is only when the old die and give place to the new that resources can be best allocated. In terms of wrong policies, the worst kind of interference with the market process consists of using public money to keep alive dead companies. As an example, this was done for IDBI, which would otherwise have crashed from being the 4th most profitable company in 1992-93 to death. The death of IDBI would have freed up resources for more efficient, more competitive companies. Instead, taxpayers were forced to suffer a cost and IDBI was artificially kept alive.

Such episodes are going to be the litmus test of sound and sensible economic policy in the coming years, given the plentiful supply of PSUs similar to IDBI. Will India be able to give these firms a decent burial, or will these ‘dead firms walking’ continue to haunt?

Ila Patnaik