There has been talk of oligarchic capitalism developing in India, driven by some papers written on the subject. The Economist, in its January 27 issue, has an article on it citing some of these subjects (Dancing elephants). And several caveats are in order. Economists who dabble in competition policy and industry structure have standard measures like Herfindahl index and concentration ratios. Assuming there is a high level of concentration, is that necessarily a bad thing? Globally, competition policy instruments can focus on structure (market shares), conduct (unfair or restrictive business practices) or performance (prices, profitability). High market share or high prices and profitability should be whittled down by competition, unless there are entry barriers created through unfair or restrictive business practices or government licensing policy. Other than mergers and acquisitions, where there are high transaction costs if a merger/acquisition has to be subsequently broken down, that?s the reason why competition policy in most countries has moved away from structure and performance to conduct. Without getting into nitty-gritty (such as incomplete redressal of unfair business practices), that?s the reason India has moved from MRTP Act to CCI Act. It is a separate matter that CCI?s suo motu action still leaves a lot to be desired.

Post-1991, reforms have led to greater competition, including that which has come in through the trade liberalisation route. However, that liberalisation has been imperfect. For instance, it is pronounced for manufacturing, limited for services and non-existent for agriculture. In both agriculture and services, licensing restrictions (through government policy) remain. Many services sectors also exhibit characteristics of what used to be called natural monopolies. If there are increasing returns to scale, is a high market share necessarily bad from a consumer?s point of view? At a local level, can open access and free choice and competition be implemented for electricity distribution? In many service sectors, former public sector monopolies have been replaced by private sector oligopolies, or even local monopolies. This requires greater regulation and oversight, not just by CCI, but also sectoral regulators. Not only has regulation failed to keep pace with liberalisation, the liberalisation is incomplete. Therefore, any talk of oligarchic capitalism has to be with reference to manufacturing, not services or agriculture. Some of these studies are indeed focused on manufacturing. However, there is a major data issue there. As back-of-the-envelope numbers, 40-45% of manufacturing originates in small-scale and medium-sized sectors. Typically, these are not registered firms. Indeed, the 3rd SSI Census showed that a large number of such firms opt out of such registration, with non-registration ratios varying across states.

Since registration brings benefits and incentives, why don?t firms register? Part of the answer has to do with high procedural costs of registration. The remainder has to do with registration bringing firms under the government?s regulatory canvas, with scope for harassment and rent-seeking. Even when firms are registered, they aren?t publicly-listed firms. Because of corporate governance requirements (such as independent directors), some smaller firms have voluntarily de-listed. Unlike developed countries, across segments, the Indian economy has a very high share of unorganised/informal elements and with development, there ought to be greater formalisation. Formal databases, including something like IIP, do not capture this sector adequately. Pre-2007, one of the driving forces behind manufacturing growth was this small-scale sector. Therefore, any exercise that bases itself on formal databases alone is likely to offer a jaundiced view. That apart, trade competition is not taken into account. Because of data limitations, most empirical analysis is based on CMIE sources, such as data on publicly listed firms. In the cell-phone market, if Nokia?s market share has been driven down to 35% from 65%, that isn?t likely to be thrown up in any such studies, or at least, not yet.

It is because of such constraints that policy implications of such studies are unclear. It is a fair point to make that competition requires free entry, and free exit and free exit don?t exist, be it for the public sector or the private corporate sector. It is also a fair point to make that there has been a public sector decline and a relative gain for the private corporate sector. But what does one read into the proposition that private sector firms now possess a greater share of sales or of profits? As a factual statement, the proposition is correct. But it refers to the corporate sector alone and Indian industry isn?t about the corporate sector. Consequently, comparison of concentration ratios in India with those in developed countries is neither here nor there. In manufacturing, it doesn?t necessarily prove the existence of oligarchic capitalism. Had the argument been made for services, on the face of it, there would have been greater credibility, since one knows that lobbying for licences has switched from manufacturing to services. But because of data constraints again, such studies cannot be done. Consequently, one has studies that have limited policy value. And in sectors where the policy value is potentially greater, there are few studies.

The author is a noted economist