When economy slows, cartelisation grows

Business Line April 28, 2009

By Pradeep S Mehta

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. — Adam Smith in ‘The Wealth of Nations’.

The new economic theory is that when the chips are down, corporate crimes go up. These include scams, cheating and collusive business practices (cartelisation). The regulators, therefore, need to tighten their oversight rules.

Businesses often collude or cartelise to fix prices, divide markets or restrict output so that they can prosper at the expense of the customer. This is true of any sector which has excess capacity and few players. They do not compete to do better, but collude to beat competition.

Binding the prices

The latest example is the cartelisation in the cement sector. While this is not something new for this sector, what is surprising is the timing. With construction activity going down, cement manufacturers have been able to raise their prices collectively. Whereas in steel, another important input in construction, a similar trend is not visible; some however believe that this sector too has engaged in cartelisation in the recent past.

Cement prices have been increased four times since January this year. In a recent statement, quoted in a financial daily, the Builders Association of India has said that cartelisation by cement manufacturers is the root cause for the frequent price hikes.

Towards end-2007, the Monopolies and Restrictive Trade Practices Commission (MRTPC) had stated that the cement industry andits associations have been colluding for over 17 years. The Tamil Nadu Government even threatened to take over the sector. But the MRTP Commission passed only cease and desist orders, which have had no penal impact. When the government allowed imports from Pakistan, the cement lobby raised the issue of Pakistani factories not having ISI licence.

Another sector which the MRTP Commission has also tried to bridle is the tyre industry but with equal ineffectiveness. When the truckers’ strike hit the nation in late 2008, the Road Transport Ministry issued half-page advertisements telling the public as to how wrong the strike was. One grouse of the All India Motor Transport Congress was the high prices of tyres due to cartelisation. In the ad, the Ministry advised the truckers to approach the MRTP Commission with evidence to deal with the collusive behaviour.

There is a new Competition Act, but the Competition Commission of India is yet to be notified and launched. In such a situation the advice to approach MRTPC was correct, but that too would not help the truckers.

Ineffective legislation

The MRTP Act, 1969 and its implementation thus far shows it is ineffective in dealing with cartels. A new law which prescribes severe penalties for cartelists, therefore, needs to be drafted.

Both the Central and State governments are empowered to take complaints to the MRTP Commission. Alas, not a single case has been filed under the MRTP Act by any government.

The Commission has dealt with the tyre cartel in the past, but has not been able to break it. What is more revealing is its action in the case of cartels by truckers themselves who form unions at the local level, not allowing non-members to pick up freight from factories where they have delivered inputs. There are less than 20 such cases in its history. But in these too merely ‘cease and desist’ orders were issued, which were often ignored.

The current financial meltdown worldwide is evoking mixed reactions around the globe. However, one aspect that is beginning to make its presence felt more than the others is cartelisation. This happens when competition gets restricted because competitors begin to collude with each other, setting a common high price that would profit all the competitors at the cost of the consumer.

Effect of financial crisis

The financial crisis provides reason enough for collusion and cartelisation. Thus, we are witnessing such cases, potential and real, all around the world. In India, the Jet-Kingfisher alliance is seen as one such. Though the professed reason for the alliance is to combat the havoc of soaring aviation fuel prices, the outcome could well be the exploitation of passengers through such means as route rationalisation and higher tariffs.

In the air cargo business, nearly every airline in the world has been hauled up by competition agencies in recent times.

Recently, the European Commission imposed the highest ever total fine by any competition authority on four car-glass manufacturers. Also, the United States Department of Justice imposed its second highest criminal fine ever on a company involved in fixing the price of liquid crystal display panels.

These cases, while pointing out the incidence of cartelisation, show the effectiveness with which they have been squashed by competition authorities.

This is a must to prevent this phenomenon from rearing its head. The enormity of the fines would ensure against such incidents repeating themselves.

Fortuitously, the new Competition Commission of India is empowered to levy fines up to 10 per cent of the turnover of the last three years. If and when the CCI starts taking action, it will be a great disincentive for those engaging in collusive activities.

In a free-market-driven world, cartelisation is considered an evil. Effective measures need to be taken against the same.

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