Economic Highlights

New Delhi, 25 June 2012

Growing Inflation

ARE CARTELS ENGINEERING IT?

By Shivaji Sarkar

It is not a mere coincidence. RBI Governor D Subba Rao calls upon the Government to look for reasons of inflation and control it as top priority for ensuring growth. Almost simultaneously, the Competition Commission of India (CCI) has levied Rs 6307 crore fine on the cement cartel of 11 companies for colluding to charge higher prices from consumers. This may not appear to be an exception, limited to only one industry or an isolated phenomenon. Given the developments around there is almost in a similar pattern in many other industries.

Cement prices have been rising abnormally. In November 2010, the prices almost doubled to Rs 275 a bag (50 kg)!  In August it was priced at Rs.142, in September it rose to Rs 190 a bag and early November it touched around Rs.260 a bag. This is not hearsay but has been pointed out by the Builders Association of India (BAI) general council member and Tirupur-based architect K. Shanmugaraj. In fact, the builders have said that even if cement is imported from Pakistan, it would not cost more that Rs 190 a bag.

Worse, the cement companies have cited bizarre reasons for the rising prices: Enhanced excise duty on cement in the Union Budget, shortage of rail wagons, increase in freight costs, fall in cement production due to increased cost of coal and short supply of power, healthy demand from the central, western, and southern regions, increased allocation of funds to various infrastructure projects and different measures introduced in the Union Budget to encourage rural growth in infrastructure.

However, facts tell a different story. Excise duty increase has added a mere Rs 5 to 11 a bag. Shortage of rail wagons may be a bottleneck but it certainly does not increase cost. Freight cost has increased marginally and should not cost more than Rs 2 a bag. Coal and power tariff may only add another Rs 2 a bag. Higher demand and production instead creates an economy of scale. If that was passed on to the consumer, price per bag would come down quite a bit. The increased allocation funds to infrastructure projects even at its original price of Rs 142 add to their profit. In any case, the increase, if at all, should not have exceeded Rs 15 a bag and should not have cost more than Rs 157.

The Commission has named almost all cement companies for being part of the cartel. In its surmise it says that the consumers have been fleeced and the companies had a net profit of about Rs 130 to 140 a bag – atrocious by any standard. The CCI also found that the cement companies have not utilised the available capacity so that there are reduced supplies in the market and they can raise prices in times of higher demand.

The act of these cement firms states the CCI in “limiting and controlling supplies in the market and determining prices through an anti-competitive agreement is not only detrimental to the cause of the consumers but also to the whole economy since cement is a crucial input in construction and infrastructure industry vital for economic development of the country”.

The nation is witnessing a people’s movement against corruption. It has shaken the Government. But large corporate firms apparently are sadly unmoved. They are only taking measures in pursuit of their illegal and unethical profits to add to the severe inflationary situation.

The large multi-nationals such as ITC, Unilever which are in the food retail and Carrefour which is in the wholesale business have been jacking up prices despite little constraint on the supply chain. There are many other indigenous retail companies, who are responsible for high prices of rice, wheat, wheat flour, pulses and edible oil. They all have had a virtual free run during the last three years.

Similarly, milk prices have been increased over a dozen times during the past two years. Two major producers Amul and Mother Dairy have not even given any reason for the almost 175 per cent increase in milk prices. From about Rs 16 a litre three years back it touches Rs 36 and more now. Milk producers have not got much of that benefit. They have been agitating for a fair deal. It calls for a detailed probe into the activities of the two major companies.

The air-conditioner and refrigerator manufacturers are another example of possible cartelisation. Two years ago a window air conditioner used to cost between Rs 9,000 and 14,000. Today uniformly none costs less than Rs 25,000. Input costs have increased marginally. The industry is complaining of poor sales but surprisingly none has reduced the price of their product. It only indicates that even at low sales they are earning high profits.

Another possible area of cartelisation is the battery industry. Battery prices have almost trebled during the last over four years. A major component, lead, has become expensive. But a battery costs much more than the additional cost of the lead. It has become a lucrative industry in many parts of the country as power situation is worsening. The list can be long. It is not the place for enumerating all the different cases. It is, however, time to introspect and initiate action.

Regrettably, the CCI does not have the powers to act suo moto. Someone has to lodge a complaint. That is a big lacuna. The general public neither has the time nor the wherewithal to lodge such legally sound complaints. The Government has different inspectorate for the purpose. But they either get bullied by large players or do not feel inclined to act. Perhaps, a part of the profits of cement and other cartels has been used for political donations.

All in all, the brunt of various cartels is being borne by the common man. Their purchasing power has come to a virtual nought. It has started affecting growth. Industrial growth is almost negative. Overall growth figure is being lowered every. Now it stands at 5.3 per cent but may further fall.

It has a telling effect on the rupee, which is plummeting every day and soon may cross the Rs 60 barrier. Rupee is suffering internationally because its value – power to buy – is going down in the domestic market. Now it appears that various cartels are responsible for this. If the process does not stop, India’s dream of being the engine of world growth would further shatter. Worse, it could lead to civil strife where nobody would trust a corporate. The Government better hear the warning bells before it is too late.---INFA

(Copyright, India News and Feature Alliance)