Saturday, November 14, 2009

India's post-reform business landscape

An NBER working paper by Laura Alfaro and Anusha Chari that examined publicly-listed and unlisted firms in manufacturing and services industries has found that contrary to expectations, there have been very few dramatic structural changes in Indian business (private and public) landscape in the post-reform period.

Exploring how industrial concentration, number, and size of firms evolved between 1988 and 2005 they find that "the economy is still dominated by the (larger) incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985)" and their respective shares of assets, sales and profits continue to persist. The exception to this broad pattern being the post-reform period emergence of new private firms in the services sector.

Another interesting finding from the statistics, though not highlighted in the study, is the contrasting fortunes of public and private sector firms with their firm profitability (measured by the average return on assets). While public sector firms have steadily increased their profits, the private firms established after 1985 have seen eroding profits. In fact, despite a small decline in the relative share of their assets (among public, pre-1985 and post-1985 private, and foreign firms) and almost constant share of sales, public sector firms' share of the total net profits has not only withstood private competition but also actually increased slightly.

The authors do not give explanations for this relative stasis. Has de-regulation not gone far enough to lower the entry barriers for newer firms? Have the larger firms indulged in monopolistic or oligopolistic strategies to keep out competitors? Does corporate India not have the required depth, both financially and technically, to catalyze newer entrants? Has increased external competition (due to lower tariffs and the process of globalization) adversely affected Indian privte firms?

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