A common tactic that large corporations in India have learnt to deploy effectively whenever they incur large losses is to impress upon the government that unless they are bailed out, the entire sector, even the whole economy, might run into deep trouble. I witnessed the use of this tactic first hand during my years at the Niti Aayog.
In 2015, a leading industrialist whom I had known for a long time came to see me and made this “too big to fail” argument to me. I smiled and told him, “I am afraid such fear mongering does not impress me.” The industrialist smiled back and said, “You are right [about fear mongering]. But when I make this argument to officials in ministries, it often produces the desired result.”
Unsurprisingly, now that the auto industry is experiencing a slump in sales, its captains can be seen making the “save us or else deluge” argument everywhere. For instance, appearing on a foreign television programme, the vice-president of sales at Suzuki Motorcycle India recently noted that commercial vehicles are the first indicator of the health of the economy and declared that their declining sales should be “a wake up call for … the government of the day”. On the same programme, the director general of Society of Indian Automobile Manufacturers (SIAM) opined, “Government has to come forward and help the industry” and that “We feel that a stimulus package is something that the government should really be looking at.”
It is nobody’s case that the government should never intervene to pull up a sagging economy. But such interventions should be the exception, not the rule. Creative destruction is an integral part of a dynamic economy. If the government implicitly underwrites the losses of private enterprises by offering stimulus any time they suffer large losses, it runs the risk of making them indistinguishable from the numerous inefficient, perpetually loss making public sector enterprises.
Profits and losses are key signals that guide investment flows in a market economy. Losses force entrepreneurs to work harder to innovate and cut costs. If they fail despite this because demand has shifted for good, it is time for them to move their investments to other, more profitable sectors. Government rescues that shortchange this process harm rather than benefit the economy.