Corporate governance: Should govt be market-friendly or business-friendly

Political acceptability comes more readily to a govt visibly involved in supporting non-corporate private sector, reducing income inequalities and regional disparities, and addressing caste concerns

The economy of independent India has gone through at least two major episodes of policy transformation. The first, not widely mentioned in public discussions these days, was the beginning of planned development in April 1951 when the First Five-Year Plan was launched. The second, more widely discussed transformation was the liberalisation that took place in July 1991. Both of these led to an acceleration of the growth process, but they differed substantially in the role envisaged for the government. The impact of these two transformations is evident in the changes in the growth, investment and trade pattern of the economy indicated period-wise in the accompanying table. Note also a third relatively low growth episode from the mid-sixties to the end of the seventies, marked by drought, a new agricultural growth policy, and a decade of political turmoil.

The extent of change brought about by the 1951-52 transformation episode may seem modest, but it represents a substantial transformation because it amounts to a nine-fold increase from the 0.5 per cent average annual growth rate that had prevailed in the century preceding Independence. The focus of economic policy during the first period (1951 to 1965) was an emphasis on public-sector development, particularly in heavy industries, though private investment also blossomed, as the investment figures show. Growth through export production was not seen as a possibility because the boom in the value of global trade really started only after the mid-sixties.

The higher growth phase clearly began by 1980 but the policy shift from public to private sector investment came significantly only after the liberalisation that followed the crisis-inspired budget of July 1991. Apart from the reduction (not removal) of government control on investment and foreign trade, a major change from the past was the opening of the banking and mutual funds to the private sector, and a radical reform of the share purchase and transfer mechanism. In fact, I would argue that this financial liberalisation is a much bigger change from the pre-liberalisation policy approach than the delicensing of industrial investment. To note just one example, we have seen an increase in new capital issues by non-government public limited companies from around Rs 600 crore in 1981-82 to around Rs 1.5 trillion in 2021-22.

The shift towards an outward export-oriented growth is less obvious. In 1951, India’s share in the world merchandise exports was 1.9 per cent. In the first transformation phase, it fell to 0.4 per cent by 1980. But since then, it has grown steadily and during the eight-year high growth phase from 2003 onwards, India doubled its share in world manufacturing exports. It has now reached a level of 1.8 per cent, still slightly below its 1951 share! The situation is more exciting when it comes to commercial service exports where India’s share in the global trade in commercial services shot up from 0.6 per cent in 1990 to 4.3 per cent in 2023.

What are the changes in government and corporate relationship that we require if we are to seriously pursue the stated goal of India becoming a developed state by 2047?

The most obvious change is to shift the relationship between the government and the private corporate sector from a partnership that promotes selected corporations to one where the government is not business-friendly, but market-friendly, and has a neutral relationship with all corporations. The argument for this is not just to avoid cronyism and corruption, but to recognise that politicians and bureaucrats are not as knowledgeable about technology, products, processes, market development as today’s corporate executives are.  The production-linked incentive (PLI) scheme, which requires detailed decisions about preferred technologies and rigorous bureaucratic scrutiny of actual performance, is an example of what needs to be changed or even forgotten. A similar move to make the government a market-friendly neutral factor is the complete avoidance of producer interests in the setting of goods and services tax (GST) and trade tax policies. If comprehensive neutrality is difficult, at least ensure that recognition of specific producer interest is an exception rather than the rule. The most important policy initiative must be to raise the competence and effective impact of the Competition Commission and to reduce rule-based barriers on take-overs.

The importance of an effective competition policy lies in its potential impact on the management dynamism of the private corporate sector, which is still widely dominated by family ownership.  However, ownership itself is not the issue. What matters is professional management of widely owned enterprises. The transformation from family managed enterprises to professionally managed enterprises will come with stronger competition and more vigorous assertion of shareholder interests by institutional shareholders. Corporations also must move away from giving priority to becoming the preferred partner of the government to focusing on their product and process technologies in comparison to domestic and foreign partners. Strengthening competition and ensuring government neutrality in its relationships with corporations will lead to this required shift in private corporate strategies.

The shift of investment from the public to the private sector makes this redesign of government policy about the private corporate sector the key requirement for the goal of making India a developed or at least a significantly upper-income developing country. However, there is a substantial public corporate sector. The government’s view of the public sector corporations seems to be largely one of seeing them as liabilities and aiming at disinvesting and converting them to private entities. Some of these corporations have been pioneers in technology development and have generated a large body of technologically well-qualified individuals who, in fact, have been actively poached by the private sector.  The government must take a more constructive view of the potential of public sector corporations to advance the growth trajectory. It must be particularly supportive of the role of the public sector in installing and managing monopoly infrastructure as privatising this, as has been done, gives some private corporations an exploitative power over others.

The policy for corporate governance that expands their freedom will not be politically attractive as it will not have mass support, though the acceleration of growth and job creation that should come from this will be welcomed. However, political acceptability will come more readily to a government that has a more visible involvement in supporting the non-corporate private sector, reducing high-income inequalities and substantial regional disparities and addressing caste related concerns. This is the true role of democratically elected government in a free-market capitalist economy. Hence the message that also needs to be understood is what was stated in the main strategy chapter of the First Five-Year Plan that “..the economic condition of a country at any given time is a product of the broader social environment, and economic planning has to be viewed as an integral part of a wider process aiming not merely at the development of resources in a narrow technical sense, but at the development of human faculties and the building up of an institutional framework adequate to the needs and aspirations of the people.”

desaind@icloud.com