Build big, grow faster

The reality is, India is poor because it does not invest in scale, particularly in infrastructure projects. The ‘money is wasted’ argument is fallacious because there are returns to investment.

It is perhaps fitting that the new cricket stadium in Ahmedabad is named after Prime Minister Narendra Modi, and not because it is in his home state, nor because of his past leadership of the Gujarat Cricket Association, nor because he is Prime Minister. Instead, it is because the new Motera stadium, just like the Statue of Unity, is hugely ambitious on sheer size and Modi is one of the few politicians in India who has consistently emphasized scale as a key to India’s prosperity. However, it is not clear whether India—its people and system of administration—wholly buys into that vision, even beyond stadiums and statues. It ought to.

The doubts fall into different categories. An oft-made argument for large projects funded by the government is, that because India is poor, it cannot afford “extravagance”. That is why the bullet train is frowned upon. The reality is the precise opposite: India is poor because it does not invest in scale, particularly in infrastructure projects. The “money is wasted” argument is fallacious because there are returns to investment. In some projects, it may be direct, like the Statue

of Unity creating a new, big tourism hub. In others, it is indirect, generating huge payback via multipliers to economic growth.

And yet, it is not easy for the Government to conceive and execute large scale projects. There is an element of administrative reluctance to wade into very large projects. Because of the large sums of money involved, and the multiple contracts that must inevitably be given to partners from the private sector, the instinct of risk aversion may come to the fore in the bureaucracy, leading to project delays or project stalls. The fear of the four CS—CAG, CVC, CBI and court—is much greater, the bigger the sum of financial resources involved. There is an additional challenge, which is largely self-inflicted by government policy, process and practice. This lies in the complex and lengthy process of approvals, which can run into hundreds in number, required to get any project off the ground, even if it is anchored by the government. The consequence is huge cost overruns which either make the project unviable or put an unwelcome additional burden on an already constrained fiscal position. Therefore, smaller projects seem less risky, less costly and easier to execute.

The preference for small over big extends to what the private sector does. That is not necessarily because Indian entrepreneurs do not want to grow into large, top of the class companies. The political economy, and the policies which are made as a result, have not always encouraged firms to become large. In public perception, big corporates are often vilified and the government chastised for “supporting” them. Small companies are romanticized, particularly for contributing more to jobs when compared with the big companies. Again, there are several misconceptions which lead to this perception. For a start, there need not be any either/or dichotomy between large and small enterprise. After all, every business starts small.

But there are economies of scale. Firms are unlikely to become cost competitive, regionally or globally, unless they attain a particular size. And every industry needs large firms to anchor an ecosystem of small and medium enterprises for reasons of competitiveness and technological advancement. In India, there is a dearth of large firms, particularly in manufacturing, outside a few sectors like automobiles and pharmaceuticals. And there is a heavy concentration of smaller firms in the micro category, which are not small or medium by international standards.

The latter do employ a lot of people in total, but the jobs provided are low wage, no benefits jobs. These firms also suffer from chronic low productivity. In comparison, large firms may seem to employ “fewer” people but that is because of high productivity. And the jobs are well paying, with benefit. These are the kinds of jobs we need many more of. Large firms also have superior ability to spend on R&D and innovation which are going to define competitiveness in the era of the fourth industrial revolution. Small firms can never be hubs of R&D.

Of course, despite all the factors in favour of large firms, it is not unreasonable to be concerned about the possibility of high concentration and market power. But the way to ensure that there is no monopoly or unfair market power is by creating the conditions for competition. In some industries like automobiles and pharmaceuticals, there is a fair degree of competition with multiple producers. Other industries may accommodate less firms. For those, there is the option of exposing the industry to import competition via low trade barriers or to take regulatory action via the Competition Commission to ensure that the welfare of consumers is guarded.

If Narendra Modi can persuade India that it is imperative to efficiently build infrastructure and companies on a large scale, the path to prosperity will be smoother and faster. The largest sports stadium in the world at Ahmedabad is a reminder that India can indeed build at scale with better than global standards. Dhiraj Nayyar is Chief Economist, Vedanta.