The power of India's family businesses: Strength in a changing economy

While concentration in the Indian economy has declined, large family business groups have strengthened their position and continue to wield significant pricing power

Indian family-owned business groups have once again been thrust into the limelight following the US prosecution of the Adani Group for alleged corrupt behaviour. While the charge is specific, the accusation that business groups benefit from connections to power has nothing new about it. Nor indeed is the view that these groups have too much market power with excessive concentration. However, much of that discussion has been stronger on assertion than on fact.

 

What is not up for argument is that successive Indian governments of differing political stripes have relied on a small number of family-owned and diversified business groups for implementing industrial and development policy. Such groups — Birla and Tata being the most well-known — have consequently dug in very successfully: Nine out of the top 20 family business groups (FBGs) in 1951 were still there in the 1990s. Although subsequently there has been more entry and exit, a stable core perennially occupies the top rankings. Has this persistence been accompanied by growing or decreasing concentration, and, ultimately, what impact has it had on competition?

 

Using the Centre for Monitoring Indian Economy’s Prowess database, our research has shown that concentration for all industries has fallen quite sharply since 20001. This is largely — but not entirely — due to the downsizing of the public sector.  But when focusing on more disaggregated levels (NIC-2 and NIC-3), a more nuanced picture emerges. Encouragingly, more than 85 per cent of NIC-2 industries have seen a decline in concentration between 2000 and 2020. For NIC-3 industries, the decline — as might be expected — has been less pronounced. By 2020, only a third of NIC-3 industries could be regarded as highly competitive, while 40 per cent still had high or very high concentration.

 

Concentration and diversification are often thought of as substitutes. Yet in India — as elsewhere in Asia — FBGs have long been highly diversified. Moreover, they have mostly accelerated their diversification. The sectors of operation for the largest 25 FBGs doubled between 2000 and 2020. Most of that diversification has been into new activities unrelated to existing operations. This is as true for some of the original FBGs — such as Tata and Birla — as it is for later ones, such as Adani or Reliance.

 

What has happened to market shares in the process? Entry has mostly not led to the accumulation of large market shares. This may be due to the limited amount of time that has elapsed, but also to competition. For example, although Reliance has achieved a large revenue share in only a quarter of the sectors it has entered after five years, those sectors account for a significant portion of the group’s revenues. The same is true for Adani.

 

Getting a rounded view of market power obviously requires looking not just at concentration but also pricing and profits. The ratio of sales to variable costs — a measure of the markup — for the largest (top 25) FBGs stayed roughly constant between 2001 and 2013, but rose sharply after that, ending up 13 per cent higher in 2020 than in 2001. Moreover, the size of the markup has been positively correlated with the extent of concentration at industry level. In short, there is still evidence of pricing power at work, especially since 2013.

 

Putting these broad changes in perspective, despite the rapidly growing size of India’s economy, family-business groups have become even more entrenched. Observing the ratio of their revenues to gross domestic product (GDP), the top 25 FBGs went from 12 per cent in 2001 to 20 per cent in 2012 before settling at around 15 per cent between 2016 and 2020. As remarkable is the weight of the top five FBGs — Adani, Birla, O.P Jindal, Reliance and Tata Sons — which accounted for between 60 and 66 per cent of that share throughout.  The story that we are telling has some mixed messages. Concentration in Indian industry has mostly been falling. But major pockets of concentration remain. Further, the position of large FBGs has improved even as many of them continue to diversify across sectors. The share of these groups’ revenues in GDP is not just high but rising. 

 

The implications for competition, and hence for policy, are manifold.  For starters, existing competition policy rules need to be applied to sectors where concentration remains very high. After all, nearly 40 per cent of NIC-3 industries are highly concentrated and the largest five firms control over 50 per cent of revenues in around 15 per cent of industries. It is no wonder that markups have also been rising.

 

There is also the issue of the rising weight of FBGs in the aggregate economy. The reasons for this include the ability of FBGs to leverage various forms of protection and preferential treatment, conferring huge advantage on incumbents. Looking forward, such advantages are only likely to grow as they spread into new activities.  Previous policies aimed at limiting the advantages of FBGs and curbing some of their worst features, including highly opaque governance and funding arrangements, have had limited success. The Adani case reinforces this point.

 

It is surely time to consider setting limits to the maximum market shares that such groups can hold before divestiture would be mandated.  Introducing inheritance taxation — as done recently by South Korea — can be an effective way to undercut the business group format. By those paths lie better governance, less inequality and greater competition.

 

The authors are, respectively, managing partner at Altura Partners, London, and associate professor at OP Jindal Global University

 

1. Liberalisation, concentration and diversification: Business Groups in India, 2000-2020. https://www.iza.org/ publications/dp/17428/liberalisation-concentration-and-diversification-business-groups-in-india-2000-2020