While the transition mentioned in the regulatory structure pertaining to competition needs to be effected with due care and attention to detail, such needs have to be balanced against the damage effected by delays in transition that result in the expansion of vital industries such as cement and consequently economic growth being crippled by cartels, says Pradeep S Mehta and Siddhartha Mitra
WHILE inflation touches new highs, a finger continues to wag accusingly at producers of basic inputs like cement and steel. Over the last year or so, cement prices have increased by around 15% which exceeds by far the general rise in the level of wholesale prices.
Such statistics confirm the positive role that cement prices played in the recent upsurge in the wholesale price index (WPI), with inflation reaching the 8% mark. Price surges in the cement sector have contributed to spiralling inflation in two ways — directly, but not very significantly, as cement has only a 1.74% weight in the WPI and indirectly, but much more significantly, as cement is a basic input into construction with a rise in its price contributing significantly to upward surges in rentals and real estate prices.
Interestingly, the recent jump in the level of cement prices is a phenomenon that both cement companies and government have failed to explain adequately. Such rapid price appreciation in the cement sector over the last year is surprising given that the financial year 2006-07 barely saw a 5% increase in cement prices. Paradoxically, the rate of economic growth in the just concluded financial year was 8.7%, considerably below the 9.6% mark attained in the FY 2006-07. As economic growth rates constitute a fair barometer of growth in demand for basic inputs, the recent spurt in prices cannot certainly be explained by a rise in demand.
It is not surprising, therefore, that suspicions about a cartel operating in this sector have been roused and fanned by the media. Such attention has culminated in the government issuing a warning to cement companies that any established complicity in cartelisation would result in stern action. However, it is easy to allege that a cartel exists; establishing cartelisation is a completely different ball game. As this article goes to press, the government has convinced cement producers to lower prices. But this cannot be interpreted as the consequence of an anti-cartel action; it is merely a quid-pro-quo for excise duty cuts.
The inherent difficulties involved in cartel busting are compounded by India’s institutional setup for tackling competition issues, which is currently in a transitory stage and, therefore, has not become fully effective. Successful cartel busting requires a committed and capable regulatory authority. In India, the Monopolies and Restrictive Trade Practices Commission (MRTPC), which has for very long served as the country’s competition authority, has not addressed the issue of cartelisation adequately. The Competition Commission of India (CCI) which has been empowered to enforce India’s new competition law (Competition Act 2002, as amended in 2007), is still at a nascent stage and it might take another year or two for it to be full operational.
While the institutional setup for formally investigating and tackling anti-competitive practices has not become fully effective, it is still possible to detect cartelisation through an intelligent analysis of data on prices, consumption and capacity utilisation. A study by Ritu Raj Arora and Runa Sarkar of IIT Kanpur points to the presence of a few dominant firms and the existence of constant levels of capacity utilisation in the face of fluctuating demand; and they conclude that these data indicate cartelisation over the last two years.
Such evidence appears to be convincing; for example, a constant capacity utilisation in the face of fluctuating consumption levels implies that in many periods, demand and supply does not match, with excess production in some periods compensating for deficits in others. In competitive markets, on the other hand, prices automatically adjust to balance supply and demand. That such competitive price levels are not attained in the case of the cement industry points to cartelisation – price being set at a level which is different from the competitive level through an act of collusion. The motive behind such cartelisation could probably be to avoid the low competitive prices which occur in the slack seasons and send profit levels tumbling to rock bottom levels.
A look at price data in the north zone shows that prices in the last two years have not fallen during the slack season implying that there is probably a concerted action by producers to restrict supply to the market in times of slack demand and maintain prices at the high level enjoyed during times of boom. Strangely, the Central zone data do not exhibit similar trends, thus indicating the presence of regional cartels.
Why is this issue of cartelisation so important? Both the government and private sector have been increasingly promising investment in infrastructure, construction and other industry. This implies that such activities are going to lead to a boom in cement demand; but with cartels operating, such expansion plans might be sabotaged by artificially-created shortages. This in turn implies that an effective regulatory framework with both the ability to investigate into potential cartelising behaviour and a mandate to adequately punish proven cartels is probably the need of the hour
While the transition mentioned in the regulatory structure pertaining to competition needs to be effected with due care and attention to detail, such needs have to be balanced against the damage effected by delays in transition that result in the expansion of vital industries such as cement and consequently economic growth being crippled by cartels.
The authors are Secretary-General and Director (Research), CUTS International and can be reached at psm@cuts.org and sm2@cuts.org respectively.