Last Wednesday, five Chinese petrochemical companies, all owned by the state, were merged to create a giant petrochemical corporation, the China Eastern United Petrochemical Co. Ltd. On Thursday North China Pharmaceutical Group Co, a major drug maker, took over rival Taiyuan Pharmaceutical.

Chinese premier Li Peng said that the establishment of Eastern United embodies the central government's policy of forming big enterprise groups. The Chinese government has initiated a major restructuring exercise for its ailing state-owned sector, and critical to its plan is the merger of companies in an effort to make them viable.

Back home, we have been unable to work out any coherent policy towards the restructuring of Indian industry. Unlike China, a large part of our industry is in private hands, but the problems confronting our companies are not too different from those affecting the Chinese units. Most of our companies have uneconomic capacities, the result of decades of protection and a misplaced bias against size. This has led to high overhead costs and weak financials, rendering the companies uncompetitive in an open environment. Our public sector units are comparatively large, but here too we can have economies of scale and can cut administrative and selling costs if companies in the same line of business are merged. Some companies which are unviable when operating alone will become viable when merged with a bigger player. This kind of restructuring in the public sector will help immensely in creating world-class organisations. And it is only when we have world-sized companies that our domestic industry stands a chance of competing with the multinational corporations. Moreover, if disinvestment is done after such mergers, the government will in all probability be able to get a better price for its assets. Consider the merger of all the oil refiners, or the various state trading companies, or MTNL and VSNL -- such mergers, focussed on core competences, will add value. In contrast, the current policy of divestment of equity in bits and pieces neither maximises the price of the asset, nor does it result in better management.

Nor need the restructuring end with the public sector. Indian industry is uniquely placed inasmuch as a large chunk of its equity is held by the financial institutions, which are state-owned. These FIs, which are also the largest lenders to private industry, can easily mount pressure on weak companies to merge or prevail on weak managements to agree to acquisition by better-run companies. Restructuring in Indian industry is already under way, but government policy implemented through the FIs can easily speed things up.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.