the richest man and our economy

Reliance’s Mukesh Ambani is now the richest man in the world, or so the media has informed us, though Mukesh Ambani himself contests this fact, stating that the manner in which his net worth has been calculated based on his shareholding in Reliance group companies is circumspect. Estimated at $63bn, he is a notch above Mexico’s Carlos Slim with Bill Gates close on Slim’s heel. Mukesh Ambani’s fortune represents 1.5 per cent of the Indian GDP.

Are the vast fortunes being made in India the result of productive entrepreneurship or private monopolies? The answer to this question depends on where the economies are likely to go. The bigger the fortunes made by extracting rent from uncompetitive markets (monopoly), the greater the resistance to the introduction of fiercer competition and so the weaker competition itself is likely to be.

For the sake of comparison: The top five Sensex constituents are: Reliance Industries (12.31%), Infosys Technologies (11.14%), ICICI Bank (8.77%), Bharti Airtel (6.1%) and Larsen & Toubro (4.85%). The top five Nifty constituents are: Reliance Industries (10.38%), ONGC (9.32%), Bharti Airtel (7.34%), Tata Consultancy Services (5.91%) and Infosys Technologies (5.59%). Of these Reliance is the only private sector company in a product sector. With the exception of L&T (FI) and ONGC (Govt.), the remaining 7 companies are private and in services, they have come up in the last 20 years about the same time the Indian markets were thrown open to foreign investors and competition.

In industry and services, if we compare with China our closest competitor: China’s industrial growth rate was 11 per cent a year. Output per worker rose at 9.8 per cent a year. Meanwhile, India’s industrial growth was just 6.7 per cent a year. Output per worker was at 5.8 per cent a year.

Now turn to services. Here India’s growth rate was close to China’s: 9.1 per cent a year, against 9.8 per cent. Output per worker contributed 5.1 percentage points of the growth in China and 5.4 percentage points in India. Here is the one sector where Indian productivity growth matched China’s. Rising factor productivity contributed 3.9 percentage points to Indian growth and just 0.9 percentage points to China’s.

Perhaps, is there a connection, the underperformance in Indian industry could be on account of a monopolistic or protectionist outlook in products and commodities but better than average performance in service is on account of competition and free enterprise that is encouraged.
Our sensex sure reflects this so does the figures tabulated by NBER.

Back to Reliance, it has a huge dominance in the polymer market, infact this market is where Reliance has amassed its mass fortunes. It controls up to 80% of the domestic polymer market. Infact in a privatization initiative of the government, IPCL a erstwhile competitor to Reliance in the polymer market was hived of to Reliance giving it further dominance and monopoly in the market. The vast concentrations of wealth sure did politically influence this sale, in a manner that does undermine the very competition India is trying to purport, this move may have been beneficial for a Reliance to take on foreign major in the long run, but in the short run the SME in the polymer business have been held at ransom in India. Ergo the polymer market in India is far smaller and is less competitive as compared to its Asian competitors.

So where is our economy heading towards productive entrepreneurship or private-political hegemony.