HOW BIG ARE BIG ENTERPRISES IN INDIA?

Summary

H. T. Parekh’s pamphlet, reproduced from the Financial Express of 16 February 1971 and issued by the Forum of Free Enterprise, takes stock of the legal and political squeeze on Indian “large houses” at the start of the 1970s. He argues that the conceptual machinery the Dutt Committee used to identify big business — drawn from the 1965 Monopolies Inquiry Commission and resting on the figure of the managing agency house, the “%house-interest” measure of effective equity, and the Rs. 20 crore asset threshold under the Monopolies and Restrictive Trade Practices Act — has been overtaken by events. With managing agencies abolished, financial institutions like LIC, UTI, IDBI, IFC and ICICI nominating directors, and family groups sub-dividing as new generations grow up, he says the same firms that the Act treats as monolithic blocs of “economic power” no longer look or behave like the houses the Commission had in mind.

From this diagnosis Parekh moves to a positive case for size. He observes that the optimum economic unit has shifted upward as technology has changed: paper plants once viable at 10 tons a day now need 100–200 tons, sugar factories that began at 500 tons of cane now run 2,000–3,500 tons, a cement plant of 1,200 tonnes costs about Rs. 10 crores. To stay competitive against international rivals, and to produce for export, Indian industry must keep upgrading plant — which means more capital, larger units, and groups large enough to diversify into new fields such as dyes, chemicals and man-made fibres. Examples like Delhi Cloth Mills, the Kirloskar group, Century Mills, Gwalior Rayon, Associated Cement Companies and Scindia Steam are offered as evidence that successful enterprises naturally outgrow a single product line.

Parekh’s conclusion is that the current statutory limits will probably need to be reconsidered, that anti-trust legislation as used in the United States and the more permissive merger regime in the United Kingdom point in the opposite direction from India’s, and that — measured against public sector giants such as Hindustan Steel, Heavy Engineering Ranchi, State Trading Corporation and Indian Oil — the bulk of Indian private firms are in fact “puny”. He grants that some of the larger private houses have grown complacent and need more dynamism, but warns that legislating against natural growth is the wrong remedy. The booklet ends with the hope that the “negative phase” of government policy toward private enterprise will pass, and is framed by paratext quotes from A. D. Shroff and Eugene Black affirming free enterprise as a positive good.

Key points

• Argues the Dutt Committee’s 1969–70 definition of a large business house, built on managing agencies and the %house-interest test, is obsolete now that the managing agency system has been abolished and financial institutions are themselves the dominant shareholders.

• Questions the continuing relevance of the Rs. 20 crore asset threshold for “large undertakings” and the Rs. 1 crore threshold for “dominant undertakings” under the Monopolies and Restrictive Trade Practices Act.

• Distinguishes between a “large business group” and a “large company,” warning that aggregating many small companies into one “house” gives a false picture of monopoly position, especially as family groups naturally sub-divide.

• Documents how technological change has raised the minimum viable scale across industries — paper from 10 to 100–200 tons/day, sugar from 500 to 2,000–3,500 tons of cane/day, a 1,200-tonne cement plant at about Rs. 10 crores.

• Asserts that international competition and export ambitions require continuous upgrading of plant, which only larger units and diversified groups can finance.

• Cites Delhi Cloth Mills, the Kirloskar group, Century Mills, Gwalior Rayon, Associated Cement Companies, Hindustan Machine Tools and Scindia Steam as evidence that growth is intrinsically tied to diversification into allied fields.

• Contrasts Indian restriction with U.S. antitrust experience (over 50 years of larger firms despite the law) and U.K. Labour Government encouragement of mergers in the national interest.

• Concludes that against the scale of public sector enterprises such as Hindustan Steel, Heavy Engineering Ranchi, State Trading and Indian Oil, the bulk of Indian private firms are small by international or even Indian yardsticks.