Conglomerate can be defined as a holding company which controls multiple corporations operating in multiple sectors. Indian economy has come to be dominated by the "Big 5" conglomerates- Tata, Reliance, Adani Group, Aditya Birla and Bharti Airtel. These conglomerates operate in diversified sectors such as Mining, Petroleum Refinery, Retail, Telecommunication, Aviation, Construction and Infrastructure, Chemicals etc.
- Share of Big 5 in Petroleum Refinery (90%), Telecommunication (84%), Retail Trade (65%), Construction (42%)
- Share of Indigo and Tata Group in Aviation is around more than 80%.
- Aditya Birla group dominates the textile sector through its various brands such as Peter England, Louie Phillipe, Van Heusen, Allen Solly, Pantaloons etc.
- Adani Group accounts for 25% of the airport footfalls.
REASONS FOR THE GROWTH OF CONGLOMERATES
- LPG Reforms: The void left by the reduced role of the government in sectors such as Telecommunication, Aviation, Construction etc. has been filled in by the rapid growth of conglomerates.
- Strategy adopted by Companies: The growth of conglomerates can be traced to their strategy of "Breadth First" and "Depth Next". As "Breadth First", companies diversified their business towards different sectors of the economy. Then as part of "Depth Next" strategy, they focussed on "mergers and acquisitions" leading to increase in their market share.
- Proactive Government Policies: The Government's proactive policy of creating "National Champions" in different sectors of the economy has also contributed to development of conglomerates. For example, initiatives under PLI Scheme are limited to companies which can achieve ambitious investment targets set by the Government. The investment targets are too big for small sized companies and hence they become ineligible to get benefits.
BENEFITS FOR THE ECONOMY
- Lower Risk of Failure of conglomerates since they operate in diversified sectors. The losses suffered in certain sectors can be cushioned by profits earned by conglomerates in other sectors. This enhances their ability to withstand risks and makes Indian economy more resilient.
- Promotes Growth and development through Innovation, job creation and enhancing productivity of economy. For example, Reliance Jio has brought positive disruptions in the Telecom sector leading to digital revolution. Similarly, Tata Group has made rapid advances in the Electric four wheelers segment.
- Fosters development of MSME sector through forward-backward linkages. For example, conglomerates procure raw materials from MSMEs. Similarly, they provide MSMEs with their technologically advanced finished goods.
- Promotes integration into Global Value Chains (GVCs): The Conglomerates act as lead firms, set up supply chains across the globe and enable integration of Indian economy into global value chains. For example, Tata Motors has become lead firm in Automobile sector.
- Ensure Aatma Nirbhar Bharat: Due to higher economies of scale, conglomerates can enhance production, reduce imports, boost exports and ensure Self-Sufficient and Resilient India.
- Promote development through Corporate social responsibility such as Nanhi kali for education of girl child (Mahindra Group), SuPoshan for addressing malnutrition ( Adani Group), Asman to improve maternal health (Reliance) etc.
- Empirical Evidence: Growth of conglomerates in South Korea (Hyundai, Samsung, LG etc) and Japan (Honda, Toshiba, Hitachi etc) have facilitated faster growth in their economies.
PROBLEMS AND CHALLENGES
- Too Big to Fail: Higher concentration of market share in the hands of conglomerates increases the risk of collapse of economy. At the same time, due to their operations in multiple sectors, there are chances of domino effects wherein failure of conglomerate in one sector could adversely affect other sectors. For example, South Korean Crisis in 1997 was due to risky investments made by Chaebols (Conglomerates) in South Korea.
- Abuse of dominant position: Conglomerates may abuse their dominant position in the market for their own advantage.
- Prevents competition: To keep their monopolies intact, the conglomerates focus on mergers and acquisitions of their competitors. Hence, Public sector monopoly before 1991 may get replaced by Private sector oligopoly.
- Price Manipulation: Higher concentration of market share in hands of conglomerates enables them to increase the prices of Goods and services. For example, recent increase in airfares.
- Risk of Crony Capitalism: Risk of Nexus between Political parties and Conglomerates wherein conglomerates would be involved in political funding, lobbying for favourable policies etc.