Building Globally Competitive Large Firms Can Put India Back On Accelerated Growth Track

Even after it staged a smart recovery in the aftermath of the pandemic, the growth of the Indian economy somehow appears range bound between 6 per cent and 7 per cent. But it needs to grow faster than that to pull out hundreds of millions of Indians who still languish in poverty and make good of the economic aspirations of a rising middle class.

Accelerating growth via exports has been a tried-and-trusted strategy. India’s experience following economic liberalisation in the 1990s bears testimony to it. As the government cleared policy bottlenecks and brought fiscal incentives, Indian exporters seized the opportunity as much as they could. The share of exports in India’s GDP doubled in the following decade topping 20 per cent, but has stayed around that level in the last decade.

It is time India explored new strategies to boost exports. Focusing on large globally competitive Indian firms could be an answer, unlike in the past when India’s export story was mostly anchored by small and medium enterprises.

A recent working paper from the New Delhi-based Centre for Social Economic Progress (CSEP – formerly Brookings India), authored by Senior Fellow Shishir Gupta and Research Associate Rishita Sachdev, break down growth in terms of three indicators: share of export in GDP, formalisation (share of large firms in national output), and ratio of corporate-investment to corporate-sales.

While the first two indicators are driven by domestic competitiveness and global trade growth and hence are structural in nature, the third one is cyclical.

It is not that large firms have not played a good role in exports and globalising themselves, but there is a much greater potential to do so in the future through formalisation and exports.

Additionally, in the last decade or so, scores of large business groups like the Tatas, Birlas, Adanis, the Bharti group-led Mittals of Airtel and Mahindras have established notable presence outside India from South East Asia to the United States, Europe and Africa. This global strategy is similar to that of the chaebols of South Korea like Samsung, LG, SK, Lotte and Hyundai.

Today, large firms account for about 55-60 per cent of India’s exports and hence are important to drive growth through the export route as well. But at an individual corporate level, on an average, only about 15 per cent of their revenue comes from exports; the rest is from domestic sales. Formalisation has also been declining, falling to 37 per cent by 2020, even as India’s share in global export has remained flat at 2.1 per cent. Clearly, structural indicators are weakening and need a reboot.

Further, having strong corporate and bank balance sheets may not automatically translate into significantly higher investment by the corporates unless it is accompanied by economic reforms. This is because corporate investment is driven by two distinct elements: formalisation and corporate-investment to corporate-sales, and the former is driven by reforms.

Introducing More Reforms

Over the last few quarters, there are indeed green shoots visible like strong corporate balance sheets indicating a possible recovery of investment in the near future.

Profit after tax for both listed and unlisted firms has surged, while that of listed firms has risen by 1.3 times in 2020-21 and 0.7 times in 2021-22. This improved profitability has also helped improve the balance sheets for public and private sector banks: the proportion of banks with higher NPAs has fallen from over 40 per cent in the last five years to under 30 per cent in 2021.

Gupta and Sachdeva posit three scenarios for the future, but the most optimistic of them pitch for further reforms around formalisation and exports to make Indian firms truly globally competitive.

Under such a situation, India’s export-to-GDP ratio is assumed to grow at a level similar to China’s between 2000 and 2005, when its ratio grew at 10.1 per cent per annum. Given a slower global growth currently compared to the early 2000s, the authors assume the growth in India’s export to GDP ratio to be 75 per cent of China’s performance between 2000 and 2005. Consequently, India’s export to GDP ratio will reach 30.7 per cent by 2027 from an average of 20 per cent over the last few years.

Since globally competitive firms would be responsible for the increase in the export to GDP ratio, their overall output is expected to increase substantially, giving spur to formalisation. The authors argue that overall, formalisation will reach 50-55 per cent of the economy.

India At An Inflection Point

Today, even as we have fully come out of the two ‘lost years’ caused by COVID-19 (FY21 and FY22), slowing down of the global economy and conflicts like the Russia-Ukraine war and the latest Israel-Hamas war raises question marks about the future of global trade including that of India.

In this context, Hyderabad-based economist and professor of Economic Policy at the Indian School of Business (ISB) Amir Ullah Khan argues that there are many factors why India may not be ready for the prescription given by the CSEP paper, “For a low-middle income economy like India, scaling and building large firms is not easy. Further, in the last decade or so opposed to the previous decade, there has been a trend of de-globalisation and greater protectionism. It has also been demonstrated by now that manufacturing built on the premise of large shop floors which employs thousands of employees is not India’s strength.”

Therefore, perhaps the best strategy for India to get out of the 6 per cent growth trap would be to strengthen MSMEs in the short term and build globally competitive large firms in the medium term.