India state firm fusion is marriage of convenience

India may see bigger as easier. Tucked into the budget released on Wednesday was a plan to create national champions, starting in the oil sector. The idea pairs industrial logic with Prime Minister Narendra Modi’s love of grand gestures, and desire to see India make a bigger mark on the international stage. Such state capitalism looks like a marriage of convenience.

A hoped-for privatisation push under the ruling Bharatiya Janata Party hasn’t materialized. Even though the party oversaw India’s last big charge to give up control of state entities between 1998 and 2004, the Modi government has so far proved reluctant to give up control of assets since it took over in 2014, and has consistently missed its own divestment targets.

India has about a dozen state-owned oil and gas companies, with significant overlap in operations. The five most critical players have a combined market capitalisation of just under $100 billion. In theory, scaling up would allow companies to cut costs and bid more for bigger projects. The larger an oil company, the more risk it can absorb on its balance sheet.

In reality, state-backed firms tend to be less efficient than their private sector rivals, and there is risk in crunching together companies with different operations, cultures and ways of working. The benefits of scale are more sure when it comes to raising funds, however. It would almost certainly be politically easier for New Delhi to sell a sliver of a large player than selling off majority stakes in many smaller ones.

The idea could spread further. The finance ministry has floated the idea for a centralized state-backed "bad bank" to deal with the problem loans crippling public sector lenders. Separately, New Delhi is also pushing its 20-odd state lenders to merge.

It might all sound a bit like China, which also has a history of jamming together state-owned enterprises. Modi, though, is simultaneously lowering barriers to foreign investment and courting private capital, hoping to turn India into a global manufacturing hub. The trick is to meddle just enough to create efficiencies, but not so much that investors fall out of love.