An assessment of India's emerging monopolies in infrastructure

While dealing with the pandemic and its consequences is occupying much of the attention, this post will focus on the possible implications of the ambitions of the two Indian businessmen who have the greatest appetite to assume risks and scale.  

In recent weeks, Mukesh Ambani has been on a remaking of Reliance Industries Limited and expansion spree into the digital space, making it clear that he wants to be the WeChat and Alibaba put-together with a physical retail footprint (not to mention being the telecom operator itself). He has accordingly struck several partnerships with the leading global investors and businesses in the relevant space, and more is being gradually unfurled. And he sits on a cash hoard from selling stakes. It's not too difficult to imagine a near future when the Reliance Group brings under its umbrella the Indian equivalent in terms of operations of Amazon, Facebook, and Netflix.

On a less spectacular note, but equally important series of events has been the emergence of the Adani Group as India's largest infrastructure company, with a presence almost everywhere outside of telecommunications. In recent times, the Group has emerged as the country's largest prospective airport operator. The originally commodity trading and then mining focused Group, dominates ports and is an important or the largest operator in thermal and solar electricity generation (largest global solar developer by capacity), electricity transmission, city gas distribution, and even railway operations.

While their respective ambitions are mega scale, the difference now lies in their respective finances as well as execution track records. While Reliance is debt-free and accumulating a cash hoard, Adani is massive over-leveraged and is surviving for now on the back of the large amounts of projects across sectors it has managed to win in public tenders as well as through debt-financed purchases. Similarly, while Reliance's track record of large-scale execution is very impressive, that of the Adanis is yet to be proven. 

Interestingly, as if by mutual design the areas of interest of both Groups do not overlap.

It's clear that between them, these two Groups now dominate some of the commanding heights of the economy - energy, transportation, telecommunications, and digital market places. Besides, each of these sectors globally are characterised by less-than-transparent capitalism and the two Groups in question have been targets of allegations of crony capitalism and being favoured by the governments of the day. 

This makes it easy enough to argue that the nation's economy, these sectors in particular, are being sold off to crony capitalists. And for sure, it is difficult also not to agree that there is some merit in the allegations. Among Indian companies, both Groups have benefited from state and central governments over the years. 

But let me point to at least five complicating factors:

1. The sectors under discussion, infrastructure and digital market places, are characterised by oligopoly and monopoly even in the developed countries. Let's not be under any false illusion about the corrosive influence of the digital behemoths in the US and how they have captured the policymakers and gatekeepers and are laying the rules of the game. The inherent nature of the digital economy poses problems unless we reimagine them completely.   

2. The evolution of these sectors, especially infrastructure, even in developed countries of today have been characterised by crony capitalism and/or state-owned firms. Every developed country has had their Gilded Ages and China is going through its own Gilded Age. We are now seeing the Indian version. See this on how pervasive crony capitalism is with infrastructure sectors has always been in India.

It is an implicit acknowledgement of this reality that Jeff Bezos, the richest man in the world, has thrown in the towel on going it alone in India and instead is piggybacking on the most connected and powerful Indian business competitor. The same applies to Facebook and Google. 

3. India's economic growth requirements are immense and it also wants rapid growth. All these sectors are critical building blocks for a large economy. And these two companies have the appetite and ambition to assume massive risks and deploy vast volumes of capital and conduct business at global scales.  

4. A disappointing feature of India's capitalism has been a chronic deficit of entrepreneurship with the appetite to scale. Almost all the historical Indian Groups, except perhaps the Tatas, have largely stayed on in their respective spheres and remained focused on the Indian market. In that respect, Mukesh Ambani and Gautam Adani have been standouts in putting capital at risk and attempt to scale rapidly into newer areas and important sectors.  

5. In the digital marketplace, the alternative to Mukesh Ambani's monopoly may be Amazon's or Facebook's. Even just recently, as Flipkart was struggling, we were all worried that India's e-commerce marketplace will have only one winner, Amazon. Further, most other sectors, including private banking are dominated by foreigners. In the circumstances, having an Indian owner for the dominant firms in these sectors, especially digital economy, makes some sense. I know global citizens and orthodox economists will scorn at this, but in the real world, I think these are important.

In summary, I'll quote from an excellent article by Ben Thompson of Stratechery,

On one hand, Jio brought the Internet to hundreds of millions of Indians that would never have had access, and the benefits of that investment are only going to increase as Jio’s services and partnerships come on line. On the other hand, locking in a monopolistic player, particularly in the context of a government that has shown a desire for more control over the flow of information is a real downside. The economic outcomes are just as muddled. Monopolies always have deadweight loss; then again, if an efficient market means that all of the profits flow to Silicon Valley, why should India particularly care about efficiency? In a Jio-mediated market it is U.S. tech companies that make less than they would have, and not only does India collect more taxes along the way, Jio’s vision of being a national champion abroad could be a huge win for India in the long run.

It is increasingly impossible — or at least irresponsible — to evaluate the tech industry, in particular the largest players, without considering the geopolitical concerns at stake. With that in mind, I welcome Jio’s ambition. Not only is it unreasonable and disrespectful for the U.S. to expect India to be some sort of vassal state technologically speaking, it is actually a good thing to not only have a counterweight to China geographically, but also a counterweight amongst developing countries specifically. Jio is considering problem-spaces that U.S. tech companies are all too often ignorant of, which matters not simply for India but also for much of the rest of the world.

I am not rationalising anything but merely putting all the different factors together to help us make a balanced assessment and make informed collective choices. 

The real problem with such dominance of the commanding heights of the economy is the likelihood of market abuse and exploitation. And the reputations of neither Group gives any comfort in this regard. Besides, the weak institutional strength and corrupt political system means that once allowed into positions of dominance, these firms can become entrenched and impervious to efforts to rein them in.

So, if these trends are allowed to play out, what are the regulatory safeguards to be put in place to limit anti-competitive practices and monopolistic market abuse? More importantly, what can be done to encourage competitors to consolidate, strike partnerships, and emerge as counterweights to these dominant firms? For example, is it perhaps appropriate in the circumstances to guide the emergence of an alternative to the Reliance digital empire in the form of one consisting of Airtel and Flipkart/Walmart? How can the next round of airports privatisation keep in mind the issue of competition as well as delivery, given the Adani's dominant market share and also overflowing pipeline of projects for delivery?

These are matters on which societies should have vibrant debates and then make choices and live with them. These debates are necessary because they have an important bearing on the trajectory of evolution of these markets, and given their importance, the evolution of the economy itself.

Update 1 (19.09.2020)

Airtel and GMR are the only two private competitors in the way of monopoly of Reliance and Adani. It's important that policies don't discriminate against them or hurt them as to drive them out of business. It's important that the next round of bidding on airports limit the number of airports that can be allotted to one bidder. Similarly, even with the Supreme Court ruling, it may be necessary for the government to resolve the AGR dues issue keeping in mind the sectors long-term health.