Writing in The Indian Express recently, political scientist Ashutosh Varshney suggested that the South Korean strategy of helping build a few large family business conglomerates (Chaebols) was successful because many of them became globally competitive and captured significant export markets. Samsung, Hyundai, LG were some examples of this strategy. He argued that the Modi government was helping build “national champions” like the Adani Group, in primarily infrastructure sectors, which come under the “non-tradable” category and consequently their competitiveness and productivity was difficult to determine at a global level.
There is some substance to this argument, but there is another dimension which was perhaps missed by Varshney. The truth is even the Chaebols of South Korea experienced major upheavals and their unbridled debt-fuelled expansion was the primary cause of big corporate debt defaults across South East Asia which caused the notorious East Asian financial crises (1997-98) when currencies of South Korea, Malaysia, Thailand etc. collapsed by 30% to 40%, prompting many of them to impose capital controls to prevent outward flight of capital. George Soros was then accused by the Malaysian PM Mahathir Mohammed of hurting the economy by bringing down the currency!
The point is that the strategy of building “national champions” is fraught with risks, even if it creates patchy success stories in the longer run.
While South Korea did build some good companies, the Chaebols had to sell a lot of their assets to deal with massive foreign debt defaults during the East Asian crises which was primarily driven by failure to repay foreign debt by corporates. This is instructive for India because in recent years, foreign debt exposure taken by a few Indian family-run conglomerates had ballooned, as they were actively encouraged by the Modi government to undertake mega projects which necessarily require large foreign savings as Indian banks don’t have capital on that scale. No wonder about 75% of Adani Group’s gross debt of $30 billion comes from foreign sources. Foreign lenders are the biggest stakeholders in the Adani group.
More ‘national champions’ and state largesse
The Modi regime is trying to shape other national champions besides the Adani Group. A classic example is the unprecedented capital subsidy up to 50% of the project cost of $20 billion (Rs 1.6 lakh crore) for the proposed semi-conductor chip plant in Gujarat by the Vedanta group. One has not seen capital subsidy of this scale to a family-owned business group in the past. Many analysts have said that the project is hugely risky as global chip supply may grow by leaps in the next few years as the US is also building massive semiconductor chip capacity as a national strategy to counter China’s tech dominance. Experts say India’s competitiveness is in chip designing and not in chip manufacturing. But the government is still risking unprecedented capital subsidy for a project whose global competitiveness is uncertain. By proposing to pump nearly $10 billion in capital subsidy, the taxpayer is being forced to share the risk with the Vedanta group.
Clearly, the Modi regime is going about its “national champion” policy in a somewhat arbitrary and whimsical manner. This is the biggest risk to the economy today. Noted American economist Nouriel Roubini who predicted the 2008 US housing market collapse, has warned that India is “increasingly driven by large private conglomerates that can potentially hamper competition and kill new entrants”.
One factor driving Modi to aggressively pursue the policy of helping “national champions” or oligopolies is that broad based private investment has failed to pick up during his nine-year tenure so far. This is admitted by government policy makers themselves. Recently Mahesh Vyas, CEO of private research firm CMIE, said data shows that new investments on the ground are very weak, barring the ones made by a few large conglomerates like the Adanis and Ambanis.
‘National champions’ to further foreign policy?
For Modi, building “national champions” is also tied to exercising the foreign policy muscle, with Western leaders eager to sell to India to retain employment in their countries. This was visible when Modi took credit for the Tatas placing a massive order of 470 civilian aircrafts from Boeing and Airbus for Air India. Please note even Indigo, a leading private airline, had bought over 400 planes in recent years but Modi has chosen to project the Tatas and their takeover of Air India as a special project. Perhaps as one of Modi’s designated “national champions”, the Tatas have undertaken the near impossible task of reviving Air India which still has accumulated losses of over Rs 50,000 crore and its quarterly losses have only increased further as more money is being spent to turn it around. Even after selling the airline to the Tatas, the Modi government still retains Air India’s debt of Rs 40,000 crore plus in its own books. There is really no relief to the taxpayer in the years to come. A necessary sacrifice for a “national champion”.
‘National champions’ in Rafale and telecom
It will be a long while before Air India turns in a net profit. In the highly controversial Rafale fighter aircraft deal which saved the French company Dassault from shutting down, the government tried to build a “national champion” in the form of an Indian offset partner who eventually fell by the wayside with his indebted defence company in the bankruptcy court.
The arbitrariness shown by the Modi government when it comes to working with big business houses is even more stark in the telecom services sector, which is to serve as a backbone for digital India. In 2017, the telecom regulator took an unprecedented decision to allow Reliance Jio a seven-month regulatory waiver to do predatory pricing and build a subscriber base of 200 million within no time. Competitors like Vodafone and Airtel cried foul and said this would break the industry’s back. But the government tacitly allowed Reliance Jio to build its subscriber base by throwing the cheapest data anywhere in the world. In a way Reliance Jio, helped by the government and regulators, revolutionised usage of cheap data by consumers as other telecom companies were also forced to drop data prices by more than two thirds. In quick time, Reliance Jio emerged as a leading telecom service provider.
The availability of cheap broadband also helped Modi reach out to millions of his subaltern support base via WhatsApp and other messenger platforms at virtually no cost to consumers. Another “national champion” has emerged in the telecom space but at the cost of competitor Vodafone going virtually bankrupt. Vodafone wrote down its entire investment of over Rs 1 lakh crore and publicly declared it would not infuse any more equity funds into its joint venture with Idea, promoted by Kumarmangalam Birla. Even Birla publicly declared he would go into bankruptcy unless the government bailed him out.
At some point the government realised that it would be bad optics for the digital India narrative if one of the largest telecom providers shuts shop and is declared bankrupt, leaving millions of subscribers stranded.
So, the next thing we saw was Modi and his advisors taking the unprecedented and highly unorthodox step to convert the massive Vodafone dues to the telecom department into equity. This was happening even as the government was struggling to bail out the public sector telecom provider BSNL where real fund infusion was needed.
‘National champions’ at the cost of the taxpayer
Recently, telecom minister Ashwini Vaishnav announced conversion of Rs 16,000 crore worth of revenue share plus interest dues from Idea-Vodafone into equity shares of Rs 10 each owned by the government.
This is nothing but using the taxpayers’ money to rescue a potential “national champion” and save the digital India story! But the reality is Idea-Vodafone is staring at bankruptcy even after the government bail-out because of its massive indebtedness. Idea-Vodafone also has debt in its books close to what Adanis owes banks and financial institutions.
In the midst of all this mess, there was also speculation that the Adanis might buy out Vodafone-Idea to mark their entry in the telecom business. Of course, later Adani denied this, but rumours continued to persist that the group would enter the telecom sector at some time or another.
Unfounded euphoria needs course-correction
In short, Modi’s “national champion” policy has all the elements of irrational exuberance and arbitrariness of the kind which do not augur well for the economy.
One big risk factor that marks out these national champions is their growing debt leverage, which may get out of control, like in the Korean Chaebols, sooner rather than later.
The nature of expansion and investments planned by these so called “national champions” have already entailed access to unsustainable doses of foreign debt. Last year Business Standard reported that Vedanta has sought Rs 5,000 crore support from LIC as offshore borrowing was getting costlier.
We are now entering a cycle of even higher interest rates and refinancing of foreign debt is becoming tough, as the Adanis are already experiencing. There is still time for policy to course correct before unfounded euphoria derails the India story.
