There’s scant oversight of India’s oligopolistic markets

Roubini, while speaking at an event in New Delhi some weeks ago, felt that a large part of India’s economic growth was being driven by “national champions" that were in reality large private oligopolistic conglomerates. Roubini cautioned that domination by oligopolies will eventually hamper competition, risk killing new entrants, result in lower factor productivity growth and eventually end up in growth stagnation. “If you look at the data, potential growth in India today is not going higher, it’s either stagnant at 6-7% or falling…," he said, adding, “that degree of oligopoly in parts of the corporate sector is part of the reason why that’s happening."

Viral Acharya, in his now well-publicized paper for Brookings Institute, argued that growing concentration of power among the top 5 private groups, “…has also been supported by a conscious industrial policy of creating ‘national champions’ via preferential allocation of projects and in some cases regulatory agencies turning a blind eye to predatory pricing. Equally importantly, given the high tariffs, Big-5 groups do not have to compete with international peers in many sectors where they are present and derive most of their revenues domestically."

Members within an oligopolistic framework tend to coordinate their actions—directly or indirectly—mostly on pricing strategy; often they even work to reduce (and preferably eliminate) competition in the industry. According to the definition provided by the Organisation for Economic Cooperation and Development (OECD), “Oligopoly markets are markets dominated by a small number of suppliers… Some oligopoly markets are competitive, while others are significantly less so, or can at least appear that way." In typical oligopolistic situations, entry costs are high for new entrants. The OECD also says that detecting how oligopolies function, with or without active explicit agreements, is not easy and usually leads to sub-par regulation by competition authorities.

In India, the Monopolies and Restrictive Trade Practices Act was enacted in 1969 to prevent concentration of wealth and power in a few hands. This was replaced by a more comprehensive Competition Act in 2002, which extended its jurisdiction to anti-competitive practices, abuse of dominant position and the regulation of mergers and acquisitions. The Act is implemented by the Competition Commission of India (CCI), which has had a mixed record in countering the growth and development of oligopolies in India, with multiple industries acquiring oligopolistic tendencies.

Telecom is an example that is often cited to exemplify Indian-style oligopoly. But there are many other industries behaving like oligopolies as well. The aviation sector’s pricing power, justified under the category of flexible market pricing based on demand-supply dynamics, stands out. It is feared that once the merger between Air India and Vistara is complete, it would intensify the aviation industry’s oligopolistic character.

Indian oligopoly has another unique trait: a particular industry may have many players, but its top two or three enjoy the lion’s share of turnover and profits in that sector. An analysis by Mint data journalists (bit.ly/40vRY41) showed that the cement industry’s top five manufacturers accounted for 48% of the industry’s installed capacity.

There is another emerging trend: the pandemic may have strengthened the incidence of oligopolistic behaviour among Indian firms. Minutes of the December 2020 monetary policy committee meeting show member Jayanth Varma expressing concern about the rising incidence of oligopoly: “Anecdotal evidence suggests that in several sectors which are characterized by an oligopolistic core and a competitive periphery, the oligopolistic core has weathered the pandemic well and it is the competitive periphery that has been debilitated. Rising profits and profit margins, improving capacity utilization and lack of new capacity additions create ripe conditions for the oligopolistic core to start exercising pricing power."

In a past ruling, the CCI had observed that abuse of dominance arises from the collective action of dominant players, and this, in most cases, is reflected in pricing behaviour. And yet India’s competition law does not recognize the concept of collective dominance, which has wide acceptance across the world. Abuse of collective dominance takes place when multiple players coordinate their actions to eliminate competition between themselves, at a cost to other competitors. India’s anti-trust law seems to recognize dominance by only a single entity, and not a group acting together. This loophole, whether inserted deliberately or left behind by oversight, privileges conglomerates with an unfair latitude but handicaps the economy’s growth potential by paying no attention to oligopolistic behaviour.

Rajrishi Singhal is a policy consultant and a senior journalist. His Twitter handle is @rajrishisinghal.