Crowding Out! The Role of State Companies and the Dynamics of Industrial Competitiveness in India

Abstract

This article examines growth patterns of government companies in India, whether their presence has crowded out private entrepreneurial activity and whether there has been a decline in the competitiveness of India's industry, measured as relative productive efficiency, for a 45 year period from 1957–1958 to 2001–2002. There was a significant growth in the number of government companies in India that effectively crowded out the entry and growth of private enterprise. This took place from the mid to late 1950s to the late 1980s and early 1990s. Correspondingly, the amount of private equity capital invested in firms declined until the late 1980s and early 1990s when there was an upsurge of private investment activity. Another feature was that a small number of government companies absorbed most of the corporate sector equity investment in India. The growth in the share of government companies in India that crowded out the entry and growth of private enterprises has had a significantly negative effect on India's industrial competitiveness. After the introduction of reforms in 1991, there has been a significant crowding in by private enterprises, displacing the government companies from their key position as holders of a very large portion of equity capital, and also reversing the trend in the decline of competitiveness of Indian industry as a whole.