Developing an Approach to Assess Benefits of Competition Reforms on Consumers and Producers: CUTS Multicountry Research Study

The Economic Times, May 03, 2008

The current inflation scenario is a global phenomenon, being spurred by a host of factors. Governments around the world are doing many things to rein it in. But what is lacking is a long-term view of an effective regulatory framework, which can curb anti-competitive practices, hoarding and black marketing, says Pradeep S Mehta

The current inflation scenario is a global phenomenon, being spurred by a host of factors, such as escalating commodity price and buoyant demand amidst slowdown in some countries. Governments around the world are doing many things to rein it in.

The measures include using trade policies, fiscal actions and what not. India too is struggling to tame the beast, with looming elections guiding some of the pronouncements and short-term actions. But what is lacking is a long-term view of an effective regulatory framework, which can curb anti-competitive practices, hoarding and black marketing.

The rise in prices has been observed across almost all sectors. Increase in the prices of food items, manufacturing goods, fuel items, cement and steel are largely responsible for the rise in the overall inflation rate at the wholesale level.

These factors, when pooled together, have contributed around 75% of the total rise in the inflation rate. And it is feared that the increase in public expenditure announced in the last budget, the Sixth Pay Commission fall outs, coupled with rising metal and crude oil prices, might take inflation to new heights.

The inflationary situation is getting worse with every week. The latest figure, shows inflation in wholesale prices to be at a peak of 7.57%, the highest in recent times, and likely to travel north. This trend is certainly a blow to the government’s efforts to control the situation.

The rise in food prices, which have contributed to the jump in inflation rate, is the most spoken about because it affects the aam admi. Adding fuel to fire, traders will indulge in hoarding and black marketing to make a quick buck. The central government can hardly do anything about it, because it is the state governments’ responsibility. If one examines the record of action and convictions under the blackmarketing law in states, the figures are dismal. What the central government can do is to create an innovative incentive scheme for states to crack down on hoarders. Reward the states who perform the best.

But, the multiplier industries such as fuel, cement and steel are mainly under the direct control of the central government and hence the cause of much of the inflation. This is where the government has to take both short-term and long-term measures, bearing in mind that growth is not adversely affected. Otherwise, we may end up with another problem.

In the fuel sector, are the factors beyond our control? There is a ‘legitimate’ international cartel, the Opec, which has pushed the price of the oil barrel to over $100. The prices will continue rising. It can only be countered by creating a consumers cartel. This idea was advocated by the former petroleum minister, Mani Shankar Aiyer and reiterated by the finance minister, P Chidambaram recently at Singapore. The government has to stop uttering homilies and start taking action.

Closer at home, the government has not been successful in regulating the cement cartel in spite of two recent actions by the MRTPC. But these actions have had no effect on the industry. To show its disappointment at the tactics of cement industries to keep prices high, the Tamil Nadu government went to the extent of threatening cement manufactures by proposing nationalisation of the cement industry. Given the government’s inability to run such industries at large, taking over the cement industry would be as bad as cartelisation itself.

Similarly, the government, which is one of the major steel players itself, has been threatening price controls. Steel prices too are soaring, and as the industry claims, it is on account of an increase in input prices. In most cases, the increase in prices of steel cannot be justified by the increase in the prices of inputs.

Another problem with the steel industry is price distortion mainly due to local manufacturers trying to match their prices to that of imported steel. This has widely affected real estate, construction and other related industries.

It will hardly be a surprise if the already worried government decides to come up with some stringent actions against steel manufactures.

Some relief is being seen particularly in the construction sector, but that will not be able to deal with the industrial consumers which are crying hoarse over the artificial price increases.

Ideally the government should be concentrating on long-term measures to control inflation coupled with sensible short-term measures. Supply-side measures such as expansion of the domestic commodity base by encouraging the manufacturing industry to expand its capacity over time, bringing reforms into the farm sector.

Nevertheless, it is equally important to improve competition and the economic regulatory environment in the country.

One good thing is that the Competition Commission of India (CCI) is in the process of establishing itself after the new born 2002 Act was amended in 2007. But the manner in which things are progressing, it will take another 1-2 years for CCI to become operational in the real sense. Its effectiveness will depend upon the type of people who will man it, something which this writer has often argued on this page in the past.

In practice, the government is adopting short-term measures, many of which are out of desperation. Since elections are approaching, it is not only an economic but also a political challenge for the government. Many of the short-term measures that the government is following will affect the investment environment in the country, e.g. restrictions on the exports of many commodities which will hurt business and farmers. The government has also decided to reduce import duties on many commodities including food items. This would hurt domestic farmers at large.

Therefore, it is important that policymakers should weigh the cost of controlling inflation against that of offsetting economic growth and then adopt an appropriate strategy.

Citizens will appreciate the government more if it behaves sensibly in controlling inflation, than in just concentrating on short-term measures which may lead to a further complication of a situation that is already serious.

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