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Sanjaya Baru: Cartels and competition

Controls politically administered can be proxy cartels, so independent regulators must step in

Sanjaya Baru  |  New Delhi 

Cartels are not new to the Indian market. As early as in 1932, the first famous one was created as a formal institution called the Indian Sugar Syndicate. For two years, it ran an unimpeded cartel fixing factory-wise production quotas and prices, of both raw material and finished product, till the government of the day, a colonial government, stepped in and dismantled it. Between 1934 and 1940, the Sugar Syndicate functioned as an association of millers largely based in northern India and made repeated attempts to help its members “manage” the market.

Jawaharlal Nehru viewed the activities of the syndicate with suspicion. In July 1940, he penned an article in National Herald: “With the coming into office of the Congress ministries, one of the first problems that their industries departments had to tackle was this problem of the sugar industry... The two provincial governments, after full consultation with the people concerned in the industry, introduced legislation whereby a measure of state control was introduced. The price of sugarcane was fixed by the government itself, while the price of sugar was controlled by a Syndicate, membership of which was compulsory for all manufacturers.”*

Internal differences among millers constantly threatened the functioning of the cartel and industry leaders Purushothamdas Thakurdas, Walchand Hirachand and Ghanshyamdas Birla were repeatedly called upon to intervene and even take up matters with Congress leaders. Nehru was loath to get into this business but Babu Rajendra Prasad, later independent India’s first president, was more than willing to step in and help. In September 1940, Purushothamdas Thakurdas wrote to Rajendra Prasad thanking him for his help, and hoping such help would be extended in future also: “We (Indian Sugar Syndicate) are extremely thankful to you for having taken up the cause of the industry and arranging meetings for the purpose of bringing home to the growers and cane cooperative societies that the problems facing the industry were as much their problems.”

Thapar went on to add: “In May 1940, under instructions from B M Birla, I had sent you a cheque for Rs 5,000 to enable you to help the sugar industry in whatever manner you might think best. I have advised the ISS office to send you another cheque for Rs 5,000 which I hope you will be receiving very soon.”

Was this a bribe? Was this payment for “lobbying”? How much would Rs 10,000 in 1940 be today? Can we accuse, with hindsight, that India’s first president was in the pay of the sugar cartel? Not necessarily, after all Rajendrababu was paid by cheque and all this was placed on record, and is now available in the archives of the Nehru Memorial Museum and Library. So, it was not a “bribe”, but a regular payment for services rendered — as an intermediary. The word “lobbyist” is more recent!

The relationship between government and industry, between politicians and businesspersons, is at all times a deeply problematic one. It was my case, in the book referred to, that the “control Raj” that the government of India ran in the market for sugar in the post-Independence period was no different from the cartel that the Syndicate ran before Independence. Controls in the hand of governments can end up serving the purpose of a cartel if policy is so amenable.

That is where regulators become relevant. Regulators are not politicians. They cannot serve as intermediaries between elements in a market or an industry. A civil aviation minister like Praful Patel may yet end up trying to sort out issues among friends, including owners of private airlines, to the satisfaction of all, including consumers, but a civil aviation regulator would be expected to adopt a transparent framework to resolve differences.

So also in telecommunications and telephony. As a minister, Mr Raja was trying to do what Rajendrababu may well have done — evolve policy to the satisfaction of all, for a consideration. But, a telecom regulator would be expected to justify policy within the framework of a policy.

Cartels are not easy to expose, but their margin for manoeuvre can be curtailed with regulatory guidelines that are fair and transparent. Ministers are not regulators. Ministers are politicians who have to do favours to win friends and influence people and further their political careers. In all democracies, politicians extend favours to businessmen and others in exchange for support, both financial and otherwise. The wheels of democracy have, after all, to be oiled.

Payments by cheque can make the process transparent, an argument often put forward by industrialist Rahul Bajaj who insists he has funded political parties transparently with payments by cheque. There is nothing illegal about such transactions, even if some feel the favours returned in exchange, by politicians, may be suspect. Very much like how some may have felt about Rajendrababu accepting payment by cheque to allow a cartel to function effectively.

The only way in which consumers can then be protected, more transparently, is to put in place independent regulators who function according to transparent guidelines, who hear depositions from interested quarters in public and justify their intervention with established principles of fair play.

Be it in telecom or civil aviation, in gas pricing or stock markets, regulators must step in and bridge the trust deficit that has come to the fore because of the undue proximity between businesspersons and politicians in power. Their primary role is to break cartels and ensure competition, serving the interests of all, including consumers.

* For a detailed discussion of the running of a sugar cartel by the Indian Sugar Syndicate in the 1930s read: Sanjaya Baru, The Political Economy of Indian Sugar, Oxford University Press, 1990.

First Published: Mon, December 06 2010. 00:03 IST