Much to the chagrin of so-called experts, the Indian economy is estimated to grow at 7 percent in 2022-23 and at 6.5 percent in 2023-24. Private consumption and public investment are the two key drivers at the moment; leading indicators suggest that private investment will pick up in the near future. A sense of balance is getting restored in the industrial growth rate too. During 2020-21, COVID-affected industrial growth was negative, from a low base it grew at 10.3 percent in 2021-22 and is estimated to grow at 4.1 percent in 2022-23. Some steps have already been taken to restore Indian industrial growth to a higher trajectory. The Production-Linked Incentive (PLI) Scheme is one such measure. The basic purpose is to move industrial growth into a higher plane based on domestic demand, export potential and China Plus One opportunities.
In recent months, commentaries on the Indian economy by Nouriel Roubini and Viral Acharya (Brooking Institution presentation) have captured media attention. Two major suggestions made are (i) reduction in the concentration of economic power, Acharya goes further and prescribes the dismantling of the five big conglomerates e.g., Reliance, Tata, Adani, Bharati and Birla; (ii) reduction in import tariffs and thereby bring down protectionism across all sectors.
Regulating Competition
The issue of concentration of economic power, one thought, had got a decent burial after the Monopolies and Restrictive Trade Practices (MRTP) Act of 1969 was replaced by the Competition Act of 2002 and its subsequent amendments. The implicit purpose of the Competition Act is to foster economic growth through better regulation. From the concentration of economic power and dominance, the focus has shifted to the abuse of dominance and how competition can get adversely affected. In the MRTP Act of 1969, an undertaking could get penalised because of market share, size, etc., (Section 2(d) of MRTP Act). This has changed, after all in a liberalised economy, economies of scale and scope are of prime importance.
The current focus is discriminatory or exploitative behaviour in the market. This could include entry prevention, predatory pricing, cartelisation and price fixing, restrictive access to certain goods and services (including digital platforms), control of input and output channels, etc. Neither Acharya nor Roubini to date have provided any case-based evidence to back their assertions about the anti-competitive behaviour of the big five conglomerates.
Dismantling of large conglomerates in the West or Japan has been spurred by capital market proddings and the business groups’ endogenous requirements of better operational efficiency, higher growth and profitability. Why should a democratic government get involved in a breakup process, as suggested, is not clear. Particularly, when regulators handling competition have not come up with any evidence relating to abuse of dominance. This is a very different situation from what Korean chaebols got into since the late nineties.
Product Differentiation
Acharya asserts that there is a causal relationship between markup and market power; the big five conglomerates with supposedly higher market power can push up markups. The analysis has been done presumably at the National Industrial Classification (NIC) three-digit product level; For example, 271 in NIC is ‘manufacture of basic iron and steel”. The average price and markup here would depend on product mix, quality and services. There is little linkage with market concentration or market power of the big five. He also suggests that higher markups feed into the wholesale price index which creates a high-cost economy. Interestingly, in mobile telephony and related services, two conglomerates from the big five have an overwhelming presence. Yet, voice and data service rates did come down, after the entry of Jio in September 2016.
Further, the econometric relationships that he presents indicate the R-square values are quite low. This makes one wonder whether the variables which have been missed out are more important in explaining variations in markup. In fact, in most of the estimates, the mean effect of variables left out is quite significant.
Tariff-industrial Policy Link
Acharya as well as Roubini takes on Indian policymakers in the area of higher tariff rates compared to the applied tariff rates of other emerging economies. For a competitive economy, there has to be an implicit linkage between tariff rates and its overall industrial policy. This often puts policymakers in a catch-22 situation and one has to actively seek out bypasses and detours. When an industrial development process focuses on linking up with the global supply chain, then goods (many of which could be intermediate in nature) have to cross borders several times. Even if there is a small duty, the cumulative effect would be quite high. A plain vanilla reduction of rates in one country won’t help, it is better to have vendors located in a Free Trade Agreement or a Regional Trading Agreement block such that the tariff rate can be nil.
Secondly, PLI schemes are a part of our implicit industrial policy. There are many reasons for PLI schemes such as quick growth in output and employment, geopolitical security in the case of critical items like drones and active pharmaceutical ingredients and genuine export growth, etc. Higher tariff rates in these and related categories provide a protective bubble. Which industries are to be selected for PLI and which firms; how long this protective bubble should be there are parts of a ‘learning by doing’ process. From the names of companies which have been selected for PLIs, it appears that there is a mix of both Indian and foreign companies, the firms also belong to various turnover and asset categories, not just big five conglomerates. In fact, the selection of champions under the PLI scheme has little to do with the big five.
Finally, the development of genuine competitiveness in the Indian economy would entail bringing down the cost of financing, infrastructure and logistics and skilled labour, removing capital and technology constraints and improving physical and soft infrastructure, etc. Along with a long-term vision, the country also needs a short-term survival strategy. The PLI scheme and higher applied tariff appear to be integral parts of this survival strategy.
Siddhartha Roy is the former Economic Advisor of the Tata Group. Views are personal, and do not represent the stand of this publication.
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