On cartels and regulators: Delhi needs to appreciate priority industries
January 18, 2021 5:25 AM
We need 21st century thinking of distinguishing cartels from competition
Delhi has to appreciate that steel and cement are priority industries.
By Yoginder K Alagh
We have again seen the government at the highest level upbraid cement and steel cartels, and announce the setting up of regulatory authorities. Officials and lawyers love this. Retired officers get sinecures in such regulatory authorities, and lawyers get lucrative jobs. Official committees like the Pai Panandikar Committee set up by Morarji Desai on decontrol may have suggested that such ‘regulation’ leads to possibility of corruption, but the files are brought out and dusted: these go back to the draconian controls of WW II and a 21st century version is suggested. Déjà vu, as an economist friend suggested.
If the market price is the same, the regulator says it’s a ‘cartel’. But then the agricultural sector, the only real case of perfect competition taught in textbooks, must be a cartel. The price is the ‘same’. Léon Walras had said that happens with ‘tâtonnements’. These are repeated transactions to achieve equilibrium. As a young man, I would get down at Sealdah station in Kolkata and walk down to my favourite ‘mishti’ shop. Hawkers were peddling fountain pens. As I walked down, I heard them saying ‘do rupiah char anna’ (one price), while coming back I heard ‘do rupiah dus paisa’ (one hawker reduced the price by reducing his commission, and then the others joined). The result is one market price. Please notice that this one price comes out of cartels, but almost perfects competition in the short run.
This is not to say that cartels are not there. But proving them needs hard work. Economic analysis based on facts is needed, which is not easy and a retired civil servant’s domain. What were the communication channels? Hotel rooms where meetings took place and so on? Even then, as the American antitrust economists have shown by diligent research, the cases go to courts, and so it goes on.
Delhi has to appreciate that steel and cement are priority industries. It is this government that has given up long-term planning of industries and the dominant role of the public sector in these priority industries. This has consequences for policy. These industries are needed for defence as these are required for roads and armaments. These are sectors with large-scale linkages needed for growth. When I used to chair the Bureau of Industrial Costs & Prices (BICP), I decontrolled both. We developed the concept of the desired price as LRMC (long-run marginal cost). The bureaucracy asked: How will you implement it? I replied we will fix the control price and the market price will be there. The controlled quantity can go for social needs or the netas’ relatives. I don’t care. How will you get the right share? I won’t. The market will. If the joint return is less than LRMC, we will reduce the controlled share. The concept of LRMC was the price needed to modernise and expand existing capacity and set up greenfield plants. It was an advance in regulation and the World Bank said so. We used dual pricing and tax and tariff policies to implement market-friendly laws.
It broke the nexus between the babu and the seth, which is the basis of corruption (with a percentage for the neta?). My successor Vijay Kelkar perfected it. The BICP published reports hiding individual firm data, but making the rules and calculations public. It is now a part of textbook industrial economics.
A lot has happened in the last quarter of century. Out there are trained economists and policymakers, including in the government to design new systems. These would, of course, take care of newer, more sustainable technologies and business practices.
Let’s do a modern 21st century version of distinguishing cartels (which, as the policymakers say, must be punished) from competition again.
Declaration of Interest: The author, an independent director of Shree Cement, strongly believes in ethical practices in business.