Ecowrap. SBI’s eco research dept terms Acharya’s conjecture on corporate ecosystem as ‘factually incorrect’

State Bank of India’s economic research department (ERD) has termed as factually incorrect former RBI Deputy Governor Viral Acharya’s recent observation attributing the rise in core inflation persistence in India to greater pricing power in increasingly concentrated industrial organisation structures.

The ERD, in it report ‘Ecowrap’, underscored that the corporate ecosystem in India thrives on co-existence of large and small players.

“It is factually incorrect to conjecture that industrial concentration power dictates pricing capacity of firms in India,” the Department said, adding that the estimated “Concentration CPI” (consumer price index-based inflation) has been consistently less than the Core CPI since January 2015.

ERD’s findings

The ERD tested the hypothesis of whether the unyielding nature of India’s core inflation is attributable to industrial organisation structures across sectors where there is evidence of imperfect competition.

Its findings suggest that the increase in prices during the pandemic was more on account of supply chain and logistical disruptions caused by the pandemic and after the outbreak of the war in Ukraine rather than firms increasing prices because of higher pricing power.

“It is thus incorrect to infer that concentration power dictated pricing capacity of firms and thus resulting in unyielding core inflation,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

He noted that for a brief period beginning January 2020 till November 2020 and also further during the pandemic as supply disruptions weighed heavily, the estimated concentration CPI was higher than the core CPI.

For its analysis, the ERD took seven sectors: Telecom. FMCG, Two-Wheeler, Passenger Vehicles, Retail Trade, Steel & Basic Metals.

Based on the presence of major players across sectors and the concomitant market share in respective sectors, the Department adjusted the respective CPI weights and estimated “CPI Industrial Concentration Index” for the period January 2015 till March 2023.

In the case of the FMCG sector, where there are many big sellers coexisting with mom-n-pop shops, and the buyers are consumers, whose preferences are the only factor dictating pricing power, the report said when this is juxtaposed with the recent spurt in e-commerce space, “we find Indian landscape is dotted with crores of mom-n-pop shops who have fared better than their etailer counterparts or organised supermarkets, most of whom have bitten the dust despite economies of scale supposedly tilted in their favour.”

‘With ONDC (Open Network Digital Commerce) on the anvil, we expect the small retailer around the corner to harness better synergy and leverage the open, democratized digital market place to the hilt,’ Ghosh said.

SBI’s ARDL (auto regressive distributed lag) model suggests that it is the Food CPI which is impacting General CPI and not Core CPI (measures the changes in the price of goods and services, excluding food and energy).

Just a one per cent increase in Food CPI increased the General CPI by 0.6 per cent in the period of April 2014 to February 2023, per the report.

“The persistent gap between CPI and WPI (currently at about 400 basis points) also indicates that input pressures have been aptly absorbed by the retailers. Our ARDL model shows that WPI has no impact on corporate profit margins,” Ghosh said.

‘Some crediility’

Acharya, in his Brookings Paper on Economic Activity, noted that the “reason why the persistence in the core inflation is rising is that consumers do not seem to be fully benefiting from input price declines, which may be due to greater pricing power in increasingly concentrated industrial organisation structures.

‘What lends some credibility to this thesis is the observation that in contrast to the rest of the world, India’s core inflation is rising more in Goods, where its industrial sectors are increasingly concentrated, than in Services, though there are early signs of pricing power rising in the Services sector too.”

Ghosh said an interesting, self-conflicting anecdote from the cited paper is the names of once shining stars across sectors, the unmistakable prodigies of the crony-capitalism period that have automatically been weeded and flushed out of the system in recent years, giving way to more efficient players with scale either through IBC mechanism or vanishing from the playbook altogether.

SBI’s study of the corporate ecosystem, nurturing and nourishing the local companies to gain scale and efficiency, demonstrates that nearly 45 per cent that survive and stay in business for more than 20 years as against the global norm of five years.

This completely flies in the face of the purported research as companies in India stay in business much longer, as the experience shows, Ghosh said.

The ERD observed that on average, 45,600 new firms were registered every year in India, in the period between 1980 and 2018. It vaulted towards 2.00 lakh (about 1.85 lakh per early estimates) in 2023.

In principle, the number of firms formed during 2018- 2022 has been much higher in comparison, with a spirit of entrepreneurship sweeping across the nation, as per Ecowrap.

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