BS Primer: Cartels and price controls

There is little evidence of cement and steel cartels

The worry is that steel and cement companies are capitalising on the high demand fuelled by the consistent Indian economic growth story so much so that they may be colluding to deliberately keep prices high, supply down and competition out against market forces. The deregulation of the steel and cement sectors almost two decades ago, has meant the abolition of price controls imposed by the government in order to keep these key inputs affordable and encourage infrastructure building.

A cartel is an agreement between firms in an industry to begin or continue an oligopoly of their product, by colluding on price fixing, market share, supply and output, profit sharing, and restricting or barring new entrants. This way, they all but eliminate competition from their market and tilt the playing field steeply against the consumers.

As such agreements are informal and clandestine, and evidence of collusion or anti-competition actions is rarely perceptible is hard to identify and punish cartels. However, cartelisation is an issue of increasing concern when inflation levels are high and climbing, because the actions of cartels often serve to drive up the median market price of their good, and thus affects the index of the market basket as well. For example, the price of steel in the last six months has risen from Rs 29,000 a tonne to over Rs. 40,000 a tonne.

Inflation is calculated on a weekly basis, as the percentage increase in the Wholesale Price Index (WPI) over the corresponding week of the previous fiscal year. Iron and steel and cement are just two of the 400 commodities in the WPI, with weights of 3.63% (for iron and steel) and 1.73% (for cement). However, they have recently contributed several times their weight to the overall inflation number. This means that their price rise is disproportionately and worryingly large, and because they are key input goods, cause a cascading inflation effect as they also impact the prices of infrastructure, engineering goods, capital goods, consumer durables, and so on.

However, so far, there has been no conclusive research to show that Indian cement and steel industries are indeed indulging in cartelisation. In fact, the steel industry has since agreed to cooperate with the government in keeping prices stable by upping capacity, and looking for other sources of increasingly expensive iron ore.

Many industry sources and economists have argued that bringing back price controls, if the government does decide to implement them to fight inflation and cartels, will stifle free trade, expansion and growth. For example, in the petroleum sector, the government mandates that petrol and diesel prices remain fixed at reasonable rates even as oil prices scale unprecedented peaks, and private firms such as Reliance Industries have had to close down their fuel retail outlets as the business has become unviable, where market forces have been clamped down.

Regulation in India is nascent and a grey area. The Competition Act was legislated in September 2007 and requires any large company to seek approval from the Competition Commission of India, before going ahead with any merger, acquisition or joint venture. This was intended to ensure that anti-competitive, monopolistic or oligopolistic, and cartelisation practices would not go unchecked. Despite the ample powers and carte blanche given to the CCI to keep competition policy running, it is still not operating at full strength.

CCI is understaffed and takes several months to process the reams of required paperwork and pass judgment on proposals. Also, the CCI will act only on complaints made voluntarily, and does not require that all companies must disclose any anti-competitive practices they are aware of. The Competition Act and the CCI are successors to the Monopolies and Restrictive Trade Practices Commission, which would penalise offending companies only by issuing "cease and desist" orders rather than levying steep fines. Lastly, the CCI is not wholly independent, as the central government can override its decision, on the representation of industry lobbyists.