By Tarunkumar Singhal, Raman Jokhakar, Chartered Accountants
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Indices representing small and mid-cap stocks have plunged. Both small and mid-caps, on the other hand, are down about 25% each. The vertiginous drop in these indices represents the real story of Indian businesses. Sensex companies, with their deep pockets and even deeper connections to India’s political, administrative and financial elites, will weather most crises unscathed. But smaller companies, without any patrons, will come out bruised.
Decades of crony capitalism have created a deep division among India’s businesses: among those with access to the powers-that-be and those without. The former run giant businesses, relatively insulated from domestic or global turbulence. Smaller businesses, which include start-up and first-time ventures, are nimbler, more entrepreneurial and often more creative in the ways they go about things. That should have given them some advantages in a properly-functioning market. But in India, success hinges on massaging the system and clearing massive regulatory hurdles. One manufacturing project can require around 30 clearances from all levels of government. In this sort of market, smaller enterprises are punished. This is in stark contrast with the West: in Germany, the mid-cap index is up 33%, in London by 35% and in New York, small caps are up 31%.
This anti-democratic cronyism is likely to drive many small and mid-size businesses out of India. Already, sugar and farm companies in Maharashtra are planning to move parts of their businesses to Africa, where land is plentiful, local markets have demand, exports to Europe are duty-free and cronyism of the desi variety is absent. Unless India clears up the policy clutter, our nimbler companies will continue to vote with their feet.
(Source: The Economic Times dated 14-08-2013)
