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Large Indian conglomerates invest only in a handful of states

LiveMint logoLiveMint 28-08-2017 Sachin P. Mampatta

In 1966, the R.K. Hazari committee on industrial licensing pointed out that Indian business houses displayed strong regional biases. The report, which classified business houses by ethnicity, noted that Punjabi investment was mainly in the Punjab-Delhi region, southern houses stuck to the southern states, and Parsi investment flowed to a few states like Maharashtra and Bihar.

While the demographic composition of Indian business houses has changed since then, the regional concentration of large Indian businesses still remains high, a Mint analysis shows. Like the Indian cricket team, Indian businesses tend to prefer familiar territory.

The analysis is based on the investment patterns of 10 large conglomerates (based on group revenue) since the turn of the 21st century. Outward (foreign) investments were not considered in this analysis. The data is based on figures for completed projects from the capex-tracking database of the Centre for Monitoring Indian Economy (CMIE), and focuses only on plants and investments that these conglomerates have built organically. Services were excluded from the analysis. The categorization of business groups by CMIE is largely based on the Hazari committee report.

As the interactive chart below illustrates, even the largest of business houses in India are deeply concentrated in a few states. The share of the top five states in completed projects within India is 83% for the Tata group, 92.16% for the Aditya Birla Group and 74% for the Ambanis. Data for business houses that have split in the period under consideration (including the Ambanis, the Jindals, and the Bajajs) have been merged to ensure comparability across the time period. The data for Telangana and Andhra Pradesh, which was bifurcated in 2014 to carve out the former as a separate state, have also been combined for the same reason.

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Even when large shifts take place, they seem to have little to do with active geographical diversification. For instance, the Ambani group’s first major single-state project outside Gujarat was in Andhra Pradesh. It completed investments related to the Krishna Godavari basin in 2009-10. There was very little choice in this investment given that large gas reserves were discovered in this region in the early 2000s.

The concentration numbers are almost as high for the newer cohort of conglomerates as they are for older business houses. The median share of top five states of three such groups included in the analysis—the O P Jindal group, Vedanta, and Adani—was as high as 90% at the end of 2016-17. The median value for the other seven groups was 92%.

Most of these investments across groups are concentrated in a few powerhouses of the Indian economy—Gujarat and Maharashtra figure prominently in this list. This is a key driver of inter-regional inequality in India. As a 2014 Plain Facts column pointed out, despite three decades of rapid growth, the share of each state in the national pie remains nearly the same as it was three decades ago. The top five states, which accounted for nearly half of the national output in the 1980s, continue to account for nearly half of national output today. The 2016-17 economic survey noted that inter-state inequality grew in the period 2004-14.

The concentration of investments by large business houses will only accentuate such gaps. Overall private sector investment too is concentrated in a few states of the country. CMIE data shows that the top five states account for 52% of all completed projects in the private sector. The figure is relatively lower for the public sector at 35%.

With the introduction of the goods and services tax (GST), states’ ability to offer tax incentives to attract new private investments is also limited, further limiting the chances of diversification of Indian industry. Even the incentive to move production closer to markets has weakened with the advent of the GST regime. While this may improve efficiency, it will only make it even more difficult for laggard states to attract investments.

The government seems to have taken notice of this; it said on 16 August that it would extend tax exemptions in the north-eastern and Himalayan states through a refund mechanism. However, this has been extended for only 10 years.

Unless such states are able to streamline regulations and ramp up infrastructure significantly in this period, they are unlikely to attract big-ticket investments once the exemption window closes. For states which do not have such exemptions but lag behind in investments, the task is even more urgent.

The visualization for this story has been designed by Mint’s partner, HowIndiaLives.

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