Cartelising inflation?

The Economic Times, June 14, 2008

It seems that it is difficult to prove cartelisation in India’s steel industry, given the information available about the national and global picture or the lack of it. This does not mean that a cartel does not exist, says Pradeep S Mehta and Siddhartha Mitra

The wholesale price index has scaled new heights and reached 8.75%; with prices and temperatures threatening to go through the roof. This promises to be a hot and expensive summer. Such long bouts of inflation generate anger against two lobbies — the incumbent political coalition for its allegedly faulty policies and the suppliers of essential inputs like cement and steel.

In this article we examine the allegations of cartelisation against the iron and steel industry. Note that iron and steel are inputs into a wide variety of goods — from cycles to automobiles, bridges to stadiums, apartments to offices. When iron and steel prices rise, accusations, even if they are not justifiable, are understandable on the grounds of human psychology.

An entire assortment of items becomes more expensive to produce and therefore to consume. Producers are unhappy because they produce less at a higher cost and lose out on profits. Consumers feel cheated as they consume less but at higher prices.

A large number of dissatisfied businesses and consumers implies that it is inevitable that some potshots are taken at the steel industry in the country. For example, on January 25, 2008, the United Cycle Manufacturers Association came out with a public appeal to the prime minister, finance minister and minister of steel in a leading English daily to check the price rise in iron and steel.

This attributed the price rise to the partnership of six iron and steel barons, and added that it was putting the purchase of a bicycle beyond the reach of the aam admi. Other manufactures have also made similar protests.

Why is this state of affairs not desirable? When people react to the world around them their reactions are often exaggerated. When rumour mills are abuzz with talk about steel cartels jeopardising our national interests these result in defensive purchases; consumers rush to buy more of the commodity fuelling further price increases. Therefore, it is essential to maintain a level head during times of inflation.

The smiling, and even stern, ministers who pacify the world around them that an inflationary episode is about to end is surely of some use. Their calmness and confidence, even though it might be a façade, can help cool off some of the inflationary tendencies in the economy resulting from knee-jerk actions by consumers and businesses.

If the existence of a steel cartel is revealed it is essential that we catch the wrongdoers and bring them to book. However, in a modern society and economy everybody is innocent until proven guilty. The same is true of cartels even though circumstantial evidence that shows the formation of cartels is admissible in litigation against them.

However, circumstantial evidence does not stand the test in a court of law. This is because a single phenomenon such as price rise might have several possible reasons — operation of a cartel, rising costs, a decline in world supply and so on.

When factors other than the operation of a cartel are active it is very difficult to attribute high inflation to cartelisation. Price watching might be the answer — this involves watching international and domestic prices over time and looking out for sudden increases or decreases in the gaps separating the two which might be representative of cartelised interventions. Let us look at the story that unfolds if we use this technique.

The latest available data for the world iron and steel price index pertain to the financial year 2006-07 and point to a price rise of 75 % for that year, much in excess of the rise of 18% in the Indian iron and steel price index.

What about the very recent past for which organised data do not exist? In India fears of cartelisation in the steel industry have been sparked by a price rise of around 20% in iron and steel in the first three months of this year. But this change has to be evaluated in the perspective of what is happening globally.

Kommersant, a Russian online daily, reported on April 29 this year that world steel prices have risen by as much as 40% on average this year, primarily due to the imposition of an export tax on steel by the People’s Republic of China that has significantly reduced that country’s steel exports and partially due to a hike in costs of production. The 20% rise in domestic iron and steel prices, though large in absolute terms, is dwarfed by the global rise of 40%.

The iron and steel price index is an aggregate which is determined by the prices and volumes bought of many different types of the metal. Could it be that the producers of one or more variety have ganged up to form a cartel — a phenomenon not discernible from the bird’s eye view of indices?

Variety specific comparisons for the last 12 months or even before are fraught with risks of inaccuracy as the international and Indian classifications of varieties do not match. But sampling indicates that detection of cartelisation should not be guided by the magnitude of price rise.

For example, in the financial year 2007-08 the price of pig iron went up from Rs 22,000 to Rs 34,500 a tonne in India. Before we attribute this phenomenon to cartelisation some more evidence needs to be examined.

Towards the end of April this year Pakistan Steel Mills raised the price of pig iron to Rs 39,200 per tonne, attributing this to a $148 (Rs 6,000) rise in the price of pig iron in the global market over the course of just one week. Our pig iron prices are not only much lower than that in neighbouring Pakistan, their upward mobility is also fairly restricted in comparison to global prices.

It seems that it is difficult to prove cartelisation in India’s steel industry, given the information available about the national and global picture or the lack of it. This does not mean that a cartel does not exist. All that we can say is that available information and knowledge does not allow us to vouch for the existence of a cartel with any degree of confidence. It seems that we are better off tinkering with macroeconomic curbs on pollution and waiting for the inflationary heat in the world economy to cool off.

The authors are Secretary-General and Director (Research), CUTS International and can be reached at psm@cuts.organd respectively.

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