The False Fear of Market Power

PAPERS AND CONFERENCE notes in economics seldom make for interesting reading (unless to use an economic analogy, one has a quaint utility function where a person enjoys reading abstract and arcane arguments). But last week when Viral Acharya, a professor at New York University, presented draft remarks at the Brookings Institution (‘India at 75: Replete with Contradictions, Brim­ming with Opportunities, Saddled with Challenges’), there was instant controversy and a storm of sorts on social media.

In his paper—which dealt with a number of subjects– Acharya also listed “concentration of power in Indian indus­try” as a “challenge”. He hinted at the dangers of “crony capital­ism” and the risk that market concentration and pricing power in the hands of “Big Five” conglomerates could be leading to inflationary pressures in the Indian economy. He was careful not to say that these conglomerates should be broken up: He just stopped at highlighting the “risks” of such industrial con­centration, but the drift of his argument is obvious.

The concentration of market power in Indian industry has been something of an obsession with academics of all hues. Far more than a cause for economic concern, it is an interesting reflection of academic sociology that cutting across diverse intellectual traditions—including Marxist and liberal, free market ones—economists have berated industrial concentration since India gained independence. Is this concentration of market power—and the concomitant pricing power that comes with it—a threat to the Indian economy?

In this context, it is interesting to compare the nature of this concentra­tion today with the past, say in the early 1980s, when India was a closed, strongly protectionist economy with some of the highest tariffs in the world. At that time, the top 20 private industrial houses (in terms of sales) were located in product markets with very few in infrastructure sectors. For example, in this list of top 20, Larsen & Toubro ranked 19th with sales of `1.8 billion in 1981. The same figure for Tata was `23.9 billion. (Source: Table 15, page 105, The Political Economy of Development in India by Pranab Bardhan, 1984). In contrast, the infrastruc­ture was a jealously-guarded preserve of the public sector. It is interesting to compare these 20 largest private industrial houses with the 25 largest industrial units for the same year. In the latter list, public sector units specialising in infrastructure and natural resources are dominant.

Four decades later, the economic landscape is unrecognisable. The top five private industrial houses that Acharya argues should be broken up are largely involved in capital-intensive sectors, especially infrastructure, such as ports, highways, telecom, and natural resources like hydrocarbons. It is worth noting that ‘in­dustries’ like ports, highways, and telecom are non-tradable and the danger of protectionism—very real in product markets—is not a cause for concern in their case. Back in the 1980s, private companies located in product markets enjoyed high tariff protec­tion as well as great pricing power. That not only led to inefficient outcomes but ended up badly hurting Indian consumers who literally had no choice when it came to consumer goods. That experience was imbibed by policymakers and companies alike and today India has very vibrant product markets.

India’s problem today is not these markets but its inability to create infrastructure. Given the manifold problems created by Indian politics, it became clear decades ago that the public sector could not be relied on to make highways, establish new ports and run them, and also provide telecom services. All these are highly capital-intensive and need large private conglomerates to do the heavy lifting.

This situation is best viewed from the perspective of trade-offs between trade protection, competition in domes­tic markets, and achieving manufactur­ing on a global scale. This is a kind of ‘impossible trinity’: one can get two, but not all three goals. For example, one can get manufacturing prowess and protect its markets but only at the cost of a few large companies dominating its market landscape. One can play around with these trade-offs and India’s economic history since 1947 clearly shows the different combi­nations that were chosen at different junctures.

It is facile to view this as a simple matter of economic choices. Take infrastructure as an example. Experience from across the world shows that this is politically driven and is not just about entrepreneurs exploiting investment opportuni­ties. India, with its huge infrastructural deficits, has tried the public sector route, with little success. National highways are an example. India doubled the length of its national highways from 29,000 kilometres to roughly 58,000 kilometres in a span of 23 years from 1980 to 2003, a period in which the public sec­tor dominated this activity. The number of years to double this length fell to 16 years (from 2000 to 2016) and is now expected to come down to a mere nine years (from 2016 to 2025). This is the period in which large private companies have come to dominate the sector. India can make a choice (or could have) by keeping these companies in check, allowing for ‘greater competition’, but ending with far fewer national highways. It is a conscious choice that was made keeping in mind that limited and poor-quality infrastructure had become a factor that hurt India’s growth prospects.

In his paper, Viral Acharya also listed ‘concentration of power in Indian industry’ as a ‘challenge’. He hinted at the dangers of ‘crony capitalism’ and the risk of market concentration and pricing power in the hands of ‘Big Five’ conglomerates. But is this subject of academic obsession really a threat to the Indian economy?

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The fear of market power leading to pricing power is a genuine concern. But here, again, the Indian experience shows something else. In India, inflationary pressures are largely due to two sets of products, very different from what the ‘Big Five’ companies produce: food items and fuels and commodi­ties. In the case of food, it is sudden changes in weather (floods and droughts) and market imperfections that lead to sudden and wild swings in prices. In the case of fuels—especially the ones used in the transport sector—India’s hands are tied as it imports the vast bulk of what it needs. If global crude oil prices go up by even $10/barrel, India’s fiscal maths goes for a six. Something similar can be seen in the case of commodities like fertilisers where India’s import dependence is significantly high. The history of inflation in India, especially that of the last three-odd years, shows this clearly. This is hardly a problem of market dominance by a handful of companies.

But just suppose, for a moment, that there is analytical merit in what Acharya argues. There are two questions that need to be answered. One, can such conglomerates be broken? Two, what will be the economic consequences of such a break-up? Here, once again, India’s past experience is useful. Back in 1969, India enacted the Monopolies and Restrictive Trade Practices (MRTP) Act. It was designed with an objective not very different from the kind that Acharya has made. The experience of run­ning that law for four decades (it was repealed in 2009) showed that large firms continued with their existence unhindered. It is difficult to believe that what could not be done in the past can be done today. But the more important question is that of economic consequences: it is one thing to try and break up large firms in product markets, but something very different— and more dangerous—in the case of conglomerates involved in areas like telecom, oil and gas, and infrastructure that require securing large doses of capital and then using them efficiently in these sectors. If broken up, who will replace these firms? The public sector? Minnows in these sectors that lack the financial wherewithal and the scarce talent needed to wade through the special problems peculiar to these sectors? The answer is simple: why solve a problem that does not exist.

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Siddharth Singh

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