ourview - The 51, after 63 years


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 look- ing 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 correct- ed. Today, the country believes in free markets, and state inter- vention in the economy is a fad- ing reality. Well, think again. If old mistakes have been recti- fied, their lessons have been ig- nored 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 Satur- day 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“ innova- tion sectors such as textiles, mining, sugar and insurance.
There is a sprinkling of light en- gineering 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 govern- ment licences and permits, and indulged in rent-seeking. Take- over battles over existing com- panies became the stuff of news. Product innovation, prof- its and productivity became bad words. An entire economic eco- system 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 estab- lished firms that have passed their innovative phase, refine and mass-produce these inno- vations. 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 free- dom permitted to private enter- prise. The results were the innovation-oriented, knowledge-in- tensive firms that created new drugs, discovered new mole- cules and wrote innovative soft- ware.

As mentioned above, the sto- ry seems to stop there. It has ac- tually been arrested there. Suc- cessive 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 sec- tors 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 num- ber of firms that offer innovative products, ones created by the ingenuity of these firms and not merely those not available in In- dia before. Your count will be very low. Today, they dominate the Indian economic landscape.
While the effects of this eco- nomic “takeover“ are yet to be felt, it will certainly lead to a sti- fling of creativity. The last time it was at the hands of the gov- ernment, this time it will be at the hands of private behemoths.

So this is the second time that a similar mistake will be repeat- ed by the government. Once due to choking regulations and now due to corrupt and botched deregulation. The first time the mistake was made in inno- cence, in the false belief that the government could deliver what citizens needed. The second time, there is no innocence.

This poses a threat to eco- nomic growth. So far, by and large, India's growth has been based on accumulation of re- sources. A high rate of savings has translated into capital accu- mulation. But as the Soviet and East Asian experience shows, this cannot go on. Sooner or lat- er, better use of existing re- sources by increasing output per unit of resource input will be the key to sustained growth.

This is where innovative entre- preneurship enters the equa- tion. Unfortunately for the country, this is the missing ele- ment 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 mo- ment, the landscape has a sprinkling of innovative firms and big, non-innovative ones. But a close look shows that most innovative firms are locat- ed 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 impor- tance of well-designed deregu- lation and permitting strong and independent regulatory in- stitutions to emerge. There sim- ply is too much to be gained by cronyism and corrupt practices.

Economists--and the govern- ment 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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