Viral Acharya, former deputy governor of the Reserve Bank of India, has set the cat among pigeons, arguing that the five largest private business groups in India are contributing to persistently high core inflation. His dominance of the economy is indicated in several ways, which he details in a research paper published by the Brookings Institution. Five conglomerates have accumulated wealth, doubling their share of non-financial assets in the country over the past 30 years. They doubled their share in mergers and acquisitions deals since 2011, even though the overall number of deals declined. Their economic expansion is manifested in both the breadth and depth of their presence in the economy. The former is captured by the fact that according to the National Industrial Classification Code, companies belonging to these groups now operate in half of all industries. The latter has captured increasing market and profit share, especially since 2015. Their rise coincided with a relative decline in the respective stocks of the next Big Five (i.e., the Big 6 through 10).
According to a report by wealth management firm Marcellus, the top 20 profit generators generate a staggering 80% of the nation’s profits. This is double what it was a decade ago, reflecting the increasing concentration of profits. The same is true in the case of wealth creation. Nearly 80% of the decadal increase in stock-market wealth as measured by the value of the Nifty index was captured by just 20 companies. There is a similar polarization in free cash flow generation across companies, where the top dozen account for the dominant share. If we triangulate the data from the Marcellus report with Acharya’s paper, it becomes clear that market power is getting concentrated. This in turn leads to pricing power. This is at the heart of Acharya’s thesis. In the standard dictionary of financial analysts, this is called the ‘pricing power’ of firms, which usually occurs in rising business cycles. When income and demand are increasing, companies respond by raising prices. This is basic economics.
But elementary economics also tells us that the ability to sell at a mark-up over marginal costs, and the power to maintain monopoly prices, do not depend solely on the state of the business cycle. It is not only in situations of excess demand that firms enjoy pricing power. This may be due to a fundamental feature of the current market structure. High prices can be maintained in monopolistic markets even when there is a decrease in demand. Much of the total ‘consumer surplus’ is appropriated by the supply side. Under perfect competition, there is no surplus left to appropriate, as prices fall to marginal costs.
Fair competition is also nurtured by a vigilant watchdog – the Competition Commission of India. Our competition law punishes abuse of dominance. It replaced the old Monopolies and Restrictive Trade Practices Act; Even tech giant Google has not been spared from punishment for abusing its dominance in the Android market. The framework of competition law is more concerned about anti-competitive behavior and less about monopolies per se. This thinking goes back to the economist Joseph Schumpeter, who said that a competitive process is one where every entrepreneur seeks to become a monopolist, at least temporarily.
Sooner or later, the monopoly is contested as rivals enter either by undermining it or by innovation. The reign of the monopolist is short-lived, thanks to the phenomenon of ‘creative destruction’. Schumpeter described it as “a process of industrial mutation which continually revolutionises the economic structure from within”, destroying the old and creating a new one.
Does India’s experience with today’s Big 5 concentration, as envisaged by Acharya, confirm or refute Schumpeter’s thesis? If the playing field is not level or the barriers to entry are steep, creative destruction will not occur and incumbents will loom large. Acharya warns that the Big 5 may be too big to fail, and can also get magnanimous and defensive when highly leveraged.
Gigantism can manifest in other ways as well. What if a large firm with deep pockets is able to resort to predatory pricing and block out new entrants? This was evident in the telecoms sector, where there was longstanding zero-pricing that did not attract the wrath of the Competition Commission. What if some large firms get duty protection on imports? We have also seen this as part of a strategy to promote ‘Make in India’ or as part of a production linked incentive scheme. Such protection is also part of an implicit effort by the Indian government to develop global champions based in India, as Japan and South Korea did in the last century. Are we trying to copy the history of keiretsu and chaebols that led to the creation of companies such as Mitsubishi, Sumitomo and Samsung? It worked in a different context about half a century ago, but is no longer workable in today’s globalized world.
Acharya’s thesis is persuasive and requires careful examination. Formalization of the economy during the pandemic, the widespread goods and services tax net, demonetisation and fiscal pump-priming have disproportionately helped large firms, while smaller firms have suffered. But inflation has also been fueled by frequent increases in prices of food items such as milk, eggs and pulses, and commodities such as oil and energy. All of this cannot be attributed to a monopoly market structure that the Big 5 have enjoyed. Furthermore, even with higher tariffs, we cannot ignore the competitive pressure of imports on large firms in India. Nevertheless, Acharya’s paper is a good trigger for the Competition Commission to undertake broad-based research on the inflationary impact of market structure in India.
Ajit Ranade is an economist from Pune.
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