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For Kumar Mangalam Birla’s textile-to-telecom empire, adversity is a 100-year-old companion. In 1919, when the Indian businessman’s great-grandfather wanted to start a jute mill, the dominant British firm, Andrew Yule & Co., bought all the surrounding Calcutta land. The Imperial Bank, the forerunner of today’s State Bank of India, initially refused Birla a loan.

The government of post-independence India stymied the Birla conglomerate with kindness. Soviet-style planning and state socialism protected the family’s legacy licensed firms by keeping competition out. But they inhibited growth. Birla’s father, Aditya Vikram, went to Thailand, Indonesia and the Philippines because he wasn’t allowed to expand at home. “I for one fail to see where the concentration of economic power is: with the big business houses or with the government?” he wondered in 1979.

Fast forward 40 years, and the 52-year-old current chairman of the group would be justified to reprise his late father’s frustration. The liberalizing spirit of the 1990s Indian economy has lost much of its force. After dismantling the license raj, a system of strict government-controlled production, and encouraging capitalism, New Delhi is gripped once more by a feverish statism that’s making Birla’s shareholders nervous. The slide began before Prime Minister Narendra Modi came to power in 2014, and was one of the reasons why businesses backed his call for “minimum government, maximum governance.” But five years later, relations between private enterprise and the government have turned even testier.

Take telecommunications, the main source of investors’ anxiety.

Ever since India opened up the state-run sector in the 1990s, the Aditya Birla Group has been an anchor investor. Partners and rivals like AT&T Inc., India’s Tata Group, and Li Ka-shing’s CK Hutchison Holdings Ltd. came and went, but Birla remained. Currently, the group owns 26% of the country’s largest mobile operator by subscribers, Vodafone Idea Ltd., with the British partner controlling 45%. An Indian court last month directed this bruised survivor of a nasty price war to pay 280 billion rupees ($4 billion) in past government fees, interest and penalties. Overall, India wants to gouge its shriveled telecom industry of $13 billion. The fund-starved government expects operators to cough up more at 5G auctions next year. How long can the Birla boss hang in? With Vodafone Idea saddled with losses and $14 billion in net debt, should he even bother?

It’s doubtful whether partner Vodafone Group Plc will linger. This isn’t the first time it has been clobbered by unreasonable government demands. In 2012, India retrospectively changed its tax law to pursue a $2.2 billion withholding tax notice against the U.K. firm. Seven years later, that dispute is far from resolved, and the unit has now been slapped with a new bill.

In its half-yearly earnings reported Tuesday in London, Vodafone fully wrote down the book value of its India operations, and warned that the unit could be headed for liquidation. Vodafone’s 42% stake in a separate cellular tower company in the country, once sold, will get used largely to pay off the loan it took to pump capital into the main telecom venture. After that, the U.K. firm will have a little over $1 billion left to support Vodafone Idea, according to India Ratings & Research, a unit of Fitch Ratings. However, the India business would be required to find $5.5 billion just for interest- and spectrum-related payments until March 2022.

Will Birla step into the breach?

Out of the Indian group’s 26% in Vodafone Idea, about 11.6% is held by Grasim Industries Ltd., and another 2.6% is owned by Hindalco Industries Ltd. Hindalco, among the world’s largest aluminum makers, is battling weak metals demand and a complicated takeover of the U.S.-based Aleris Corp. The bulk of the burden of a telecom rescue — should there be one — would fall on Grasim. It acts as a holding company for Birla’s cement and financial services businesses, apart from directly owning factories that churn out wood-based fiber and chemicals like caustic soda used in soap and detergent.

Mumbai-based Emkay Global Financial Services says that in the worst-case scenario, where the government doesn’t back down and Birla refuses to fold his telecom cards, a rescue mounted by by Grasim could cost it 187 rupees per share. If Birla refrains from throwing good money after bad, the value of everything else Grasim owns net of debt is 1,126 rupees a share, or 47% more than the current stock market price. Clearly, the overhang of the Vodafone uncertainty is playing on investor psyche. Once the U.S.-China trade war stops making global textile markets jittery, fiber prices will firm. Grasim, in investors’ view, is better off spending $2 billion on new capacities in fiber, chemicals and cement than wasting any more money trying to salvage the telecom.

The Indian government should see the folly of effectively turning the telecom industry into a two-horse race between Reliance Jio Infocomm Ltd., controlled by Mukesh Ambani, the richest Indian, and Bharti Airtel Ltd., which, too, is staggering under a mountain of debt. As IIFL Securities put it, bankruptcy of Vodafone Idea would hurt all stakeholders. Vodafone and Birla would lose control, the government would forgo $1.7 billion in annual spectrum revenue and banks would take losses on their $4 billion-plus exposure.

Such an outcome would cast a serious doubt on the ability of private entrepreneurs to flourish, especially if they — like Birla or Amazon.com Inc. boss Jeff Bezos — happen to find themselves in competition with Ambani in a tightly regulated industry. Future investors will think twice. The rift between the government and business wasn’t Modi’s creation, but to allow the mistrust to turn into a chasm would be one of his administration’s gravest mistakes. -Bloomberg

Also read: Modi govt refuses to waive Rs 92,000 crore dues of Airtel, Vodafone Idea

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