Making competition bite

Regulators in India often have the power to bark but not bite. The Competition Commission of India (CCI) is an exception, with well-defined powers.

The CCI has been entrusted with the task of ensuring that consumer markets in India are fair and competitive. Unlike the Securities and Exchange Board of India (SEBI), it has real teeth and can impose very stiff penalties indeed on those who fall foul of it.

But its job is not an easy one. Many sectors in India have oligopolistic structures that inevitably lead to a great deal of collusive price fixing. The situation is made worse by the presence of large public sector firms that until recently were monopolists. The government feels obliged to protect their inefficiencies and introduces distortions that benefit the private sector entrants.

Power to bite

Under the new competition law, firms found guilty of sharp practice — misusing their dominant market position, huddling into cartels or manipulating prices — can be slapped with hefty fines amounting to 10 per cent of their turnover or three times their annual profits. And CCI has been handing out these penalties quite liberally in the last year or so.

Among other things, it imposed a Rs 55-crore fine on the National Stock Exchange for trying to ‘eliminate competitors' in the currency derivatives market. It then slapped a Rs 630-crore penalty on realty giant, DLF, for imposing one-sided clauses on flat buyers.

Its most recent exploit was to pull up three pesticide makers for indulging in bid rigging and collusion in a Food Corporation of India tender. United Phosphorus, slapped with a Rs 225 crore penalty last week, pointed out that the value of the tender was only Rs 24 crore!

Strong deterrent

However, it is probably a good thing that penalties for distorting competition are as stiff as they are. Nearly two decades after we set the ball rolling on liberalisation, quite a few sectors in India are yet to allow a free play of market forces.

First of all, catering to government contracts is big business (CCI estimates that public procurement accounts for 30 per cent of GDP). And given that the tendering and bidding process in these contracts is often shrouded in secrecy, there is plenty of scope for collusion, corruption and bid rigging.

CCI's own investigations have unearthed cases of pesticide makers and LPG cylinder manufacturers quoting identical and, sometimes, inflated prices for supplying goods in government tenders.

Entry barriers

Then, there is the fact that many consumer-facing sectors in India have just one or two players dominating the market.

Capital constraints, procedural delays, political clout wielded by entrenched players as well as regulations have erected formidable entry barriers.

In the life insurance space, despite over 20 new private players setting up shop, it is the LIC that holds a 75 per cent share of policies in force. In capital markets, over 80 per cent of the cash equity market transactions today happen on the NSE platform.

The problem of concentrated shares exists even in sectors that were liberalised years ago. Thus, ITC rules over cigarettes with an over 70 per cent market share; Colgate controls over 52 per cent of the toothpaste market.

Even an innocuous category such as malted beverages has the top firm (GlaxoSmithKline) holding over a 70 per cent share.

This sort of market dominance may well give players the advantage of concerted price action and loads the dice against the consumer.

What is more intriguing is that players seem to enjoy plenty of pricing power even in sectors with splintered market shares. Have you noticed how mobile phone tariffs, which were falling, have started moving up from end-2011? Or wondered why your airfare on a Delhi to Chandigarh flight should sometimes be the same as that for Delhi to Chennai?

The cement industry is a classic case. Despite a slowdown and excess cement capacity, cement prices have risen 20 per cent in select markets in the last two years.

Rising tariffs

Where the sector dynamics is fairly robust, regulatory or judicial restrictions seem to queer the pitch. Take the case of telecom. A poster-boy for privatisation, this sector has recently seen new entrants drop like flies with regulatory uncertainty about new licences and spectrum.

With the hands of incumbents strengthened, tariffs have begun to move up.

Airlines may soon go the same way. With the gradual decline of Kingfisher and Air India, private carriers — Jet Airways and Indigo — already control a 51 per cent share of passenger traffic.

An economic slowdown too tends to strengthen the hands of large firms with financial muscle, while weaker ones fall by the wayside.

What all this suggests that the CCI, despite the flurry of actions it has taken recently, cannot afford to rest on its laurels. There is still plenty to do, if it is to fulfil its mandate of clearing the decks for free play of competition in the Indian marketplace.

This fortnightly column will take a fresh look at issues in policymaking in financial markets and flag the ones that merit a rethink.

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