Impact of Cartelization in Cement Industry
Issue 27 | February 14, 2021
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices” – Adam Smith, Wealth of Nations (1776)
Competition regimes play a pivotal role in sustaining healthy competition and driving the economic growth of a nation. The competition regime in India has had transitions from the erstwhile Monopolies and Restrictive Trade Practices Act, 1969, to the current Competition Act, 2002 (hereinafter the Act). Though the financial year 2020-21, marred with dips, recessionary trends, and a countrywide lockdown, is coming to an end and the IMF projecting favourable growth rates for India’s economy in 2021, the hurdles engulfing the Indian leadership’s dream of a $5 Trillion economy are far from over. The menacing threat of cartelization by cement companies, though not a sole determinant, can inflict considerable damage at the micro and macro levels alike. The Act under Sec. 2(c) defines Cartels as “an association of producers, sellers, distributors, traders, or service providers who by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or, price of or trade in goods or profession of services”. Competitive pricing being a key to a company’s fortune, companies in a particular sector may form cartels to inflate the existing prices by limiting supply, price-fixing, etc. Cartels, one of the focal points of Competition laws, not only have the potential to harm enterprises in an allied market but also cause great harm to consumers and the overall economic development.
The Director-General of Investigation, CCI, in their latest order, slapped fines worth INR 6,200 crores against leading cement companies, who were found to have underutilized their production capabilities, so as to collectively reduce the supply of cement, consequentially leading to recurring phases of price rise. While those directly affected by the same might be restricted to a particular sector, a study by UNCTAD indicates adverse effects on the national economy in the long-run. As far as consumers are concerned, the participating enterprises in a cartel either keep their price levels the same or increase them in collusion so as to reduce the elasticity of demand. A similar situation is believed to have surfaced with respect to the cement and steel industries in India, which has forced builders to subscribe to the existing rates in spite of recurring price rises. Higher input prices have adversely affected the housing sector which has failed to attract buyers owing to the “artificially high” prices, leaving behind a large inventory of unsold flats, houses, and multiplexes across the country. Though the effects of cartelization have, so far, been limited to the housing sector, if unchecked for a prolonged period, this can dampen the potential of the cement industry of India, which was, until the pandemic broke, considered a catalyst in India’s export trade.
With the price of cement bags going up by INR. 100/bag, the government spending in the infrastructure sector is expected to go up by 10-15%, which has deprived other sectors, like healthcare, education, public transport, which have been calling for reforms, now more so, with normalcy returning in a phased manner. Though the government is considering expanding its free-market ideology to other sectors, their first approach should be to put a check on existing cartels across various markets such as the Cement and the Telecom sectors, to bring down the prices to competitive levels. Furthermore, the government needs to consider bringing in reforms within the existing framework, to revive the sanctioning under the act, which has had a despicable track-record while recovery of fines from the respective defaulters. The pandemic’s massive blow to non-essential businesses across India, coupled with a price rise as a result of cartels, has already impacted purchasing power and consumer behaviours severely, while paving the way for over-investment, in exchange for relatively reduced output. However, instances from the past couple of months have indicated that the Competition Commission of India has adopted an extremely lenient approach due to the pandemic’s aftermath on Micro, Small, and Medium Enterprises (MSMEs). Setting aside the cement saga, the CCI let go of an automobile-bearings cartel, by warning them and issuing notices against such practices in the future, which has indicated the difference in CCI’s approach while taking cognizance of anti-competitive practices in different markets, which might compromise the interests of the National economic growth.
The reforms brought by the then government, in 1991, were meant to open the economy, not just for foreign investment but healthy competition as well. However, like every other economy, the move which was envisaged to cultivate healthy competition has, in a way, paved the way for anti-competitive practices by sidelining consumer welfare and economic growth across sectors. With the Competition Commission of India not living up to its expectations in sectors involving cement and steel, telecom, aviation, etc., one mustn’t turn a blind eye to monopolistic tendencies existing in government-controlled sectors, such as Coal Mining, Railways, etc. Thus, the government must turn to a competition Policy within the existing framework of Competition Law which caters to sector-specific needs and aids the CCI in adopting a holistic approach by directly impacting enterprise behaviour and, ultimately, restricting anti-competitive practices across various sectors, to a greater extent. Though the recent government initiatives concerning railways, aviation, and coal mining might bring some respite, the lack of long-term institutional reforms is bound to push such incentives towards the future possibility of cartelization among the existing private enterprises in a sector which has showcased monopolistic tendencies for decades.