During the 26th meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), one of the MPC members - Jayant R. Varma, Professor, Finance and Accounting, IIM Ahmedabad - made an interesting observation, which many in government institutions would barely admit to.
"Anecdotal evidence suggests that in several sectors which are characterised by an oligopolistic core and a competitive periphery, the oligopolistic core has weathered the pandemic well and it is the competitive periphery that has been debilitated. Rising profits and profit margins, improving capacity utilisation and lack of new capacity additions create ripe conditions for the oligopolistic core to start exercising pricing power," he had said. An oligopoly is a form of market form where a sector/industry is dominated by a small group of large companies.
Professor Varma refused to comment on the issue and name the companies when Business Today contacted him, saying "there were some constraints on MPC members commenting on MPC matters."
In the last couple of years, many large businesses fell by the wayside as mounting debt forced them to distress-sell or sell their assets after being put through the insolvency process. Reliance Communications, Reliance Infratel, Essar Steel, Bhushan Steel, Future Retail and Videocon Industries were sold off either through merger & acquisition (M&A) deals or the insolvency process.
So, whether it's Future Retail selling out to Reliance Retail, Adani Port and SEZ acquiring a controlling stake in Krishnapatnam Port from the CVR Group, Adani Group picking up 74 per cent stake in Mumbai International Airport from GVK, or JSW buying out Bhushan Power and Steel and Monnet Ispat or Vedanta buying out 13 group companies of Videocon and Electrosteel - the deals saw old sectoral giants giving way to new business leaders, and creating a more concentrated market.
Business Today tried to reach out to the companies, but did not get a response.
As consolidation picks up pace and few firms get bigger, India Inc. is seeing market share, revenue and profit concentrating among a handful. According to Saurabh Mukherjea, Founder and Chief Investment Officer of Marcellus Investment Managers, large swathes of the Indian economy are controlled by 20-25 families. "The top 20 companies in India generated 70 per cent of profits of the corporate sector (in 2019/20), compared to only 15 per cent in 1992/93." Mukherjea thinks this will only increase over time.
CMIE data over the last 20 years corroborates Mukherjea's claim. In 2000-01, Sensex 30 companies accounted for 35 per cent of the profit of all the listed companies. In 2019-20, it rose sharply to 75 per cent.
So, are Indian markets becoming more concentrated and less competitive? Is the balance tilting in favour of a few companies in certain sectors?
Globally, companies including technology giants such as Google, Facebook and Amazon, have been criticised for too much market power. How grave is the situation in India? Are these concerns genuine and is such market dominance always bad?
Much of this debate was triggered by a few of the following developments - a flurry of investments received by Reliance Industries and its subsidiaries, and its subsequent acquisition of Future Retail; Adani group's acquisition of a 74 per cent stake in Mumbai International Airport, after it had won the rights to manage six other airports also fuelled the talks. Sectors, including cigarettes, non-banking finance companies (NBFCs), small cars, paints, adhesives, baby milk powder, hair oil, pharma APIs and health diagnostics, also throw up such examples.
Nestle, for example, has an 85 per cent share in the baby foods market. ITC has a 77 per cent share in cigarettes, Pidilite has 70 per cent in the adhesive segment, Bajaj Corp has 60 per cent in hair oil, and Asian Paints around 40 per cent in the paints market.
But, how genuine are these concerns?
The Reliance-Future deal will put Reliance Retail beyond the reach of most players. Reliance Retail will add 1,500-1,700 more stores to its existing network of 13,000 stores across more than 7,000 cities and towns across India. The distant second will be D'Mart with close to 250 stores.
Besides consolidation in the brick-and-mortar segment, the Jio platform gives Reliance Retail an edge over others for its online retail play. And even if it only controls 20-25 per cent of the modern retail market (the largest market share in the sector), experts see it growing much bigger, thanks to its revenues increasing over nine times - from Rs 17,640 crore in 2014/15 to Rs 1,63,000 crore in 2019/20 - and the leverage that Jio offers.
Says Arvind Singhal, Chairman, Technopak Advisors, a management consulting firm, "Reliance (Retail) will become bigger and bigger for multiple reasons - its strategy is fundamentally sound, it offers multiple products and services on the same platform. You have services through Jio platforms, and as far as physical retail is concerned, they are trying to partner with independent retail outlets for cash and carry. The numbers show that it is working."
Even rivals agree. Govind Shrikhande, former Managing Director, Shoppers Stop, says none of Reliance Retail's competitors have 400 million mobile subscribers like Jio has. "A telecom customer interacts with the network every second. He is on the network and that's one advantage which none of the (other) players have. Reliance has tied up with Facebook to get the WhatsApp tie-up in. Now, WhatsApp is ready for payments. It will give Reliance an upper hand, as India is WhatsApp's single-largest market globally with over 400 million users. It will give them a large base of customers who are interacting with them every day, every second."
While critics may raise a hue and cry, the anti-trust regulator, Competition Commission of India (CCI), does not see the Reliance-Future deal affecting competition in the retail sector. Approving the acquisition, the CCI said in its order that "the proposed transaction will not lead to any change in the competitive landscape or cause any appreciable adverse effect on competition in India, irrespective of the manner in which the relevant markets are defined."
According to experts, some of these businesses have created entry barriers - regulatory or technology driven - which are insanely high.
Mukherjea of Marcellus Investment Managers cites the example of the infant milk powder segment, where, he says, no one can compete with Nestle, partly because advertising is prohibited. Infant Milk Substitutes (IMS) Act, 1992 bans any kind of promotion of infant formula, feeding bottles and infant foods for 0-2 year-old children.
Nestle India spokesperson refused to comment on the issue.
Then there is Asian Paints in the paint segment with 40 per cent market share. "Asian Paints removed all layers of channel partners and reached out directly to paint dealers on the high street, while also compressing their channel margins. The incentive offered to these dealers was supply chain efficiencies (of three-four deliveries per day), which helped them generate healthy returns on capital employed. This capability was built using tech investments to forecast demand with greater accuracy compared to their competitors," explains a note by Marcellus.
In January (2020), JSW Paints filed a complaint against Asian Paints with the CCI, saying the latter had denied access to the distribution channels in the relevant market to JSW Paints by threatening and coercing such dealers through various means. The CCI found merit in the complaint and launched an investigation into the charges.
Or take the example of Bajaj Finance, the leader in consumer loans.
"Bajaj Finance leveraged technology to develop credit algorithms to capture data points which are not captured in credit scores generated by a credit rating agency, and built a huge data-based lending engine to identify the credit worthiness of retail borrowers," says Mukherjea.
Reliance's foray into telecom with the launch of Jio in 2016 offering free voice, zero roaming charges and free data rates, is probably one of the most strategic business moves in the last decade, keeping in mind the future potential of digital economy and Big Data. Within three years of its launch, Jio emerged as the leader by number of subscribers, ahead of incumbents such as Airtel, Vodafone and Idea.
Jio currently has a 35 per cent market share (in terms of the number of subscribers), followed by Bharti Airtel (28.7 per cent) and Vodafone Idea (25.5 per cent). Jio is also the leader in broadband (wired and wireless) with a 55.6 per cent share, followed by Airtel at 23 per cent.
Of course, approval to its consumer plans was objected to as crony capitalism by the then incumbents - both Airtel and Vodafone - accusing the regulators of favouring Reliance Jio. "Over the last two years, we had many regulatory outcomes that were against everyone in the market except Jio," Vodafone CEO Nick Read had said in February 2019.
Former Telecom Regulatory of India (TRAI) Chairman Rahul Khullar had said in 2018 that Jio's entry had to be disruptive as it was the only way for it to succeed. However, he was quick to mention the regulatory action that became the 'invisible hand' determining Jio's economic fortunes.
Much has also been said about Gautam Adani and his turn of fortune since 2014. Adani is the second-richest man in India, after Reliance Industries' Mukesh Ambani. His personal wealth has more than doubled to $32 billion compared to Mukesh's $75 billion in the last one year. Adani owns a group of companies in varied businesses - ports, power, food and airports. It has also won the right to upgrade and operate six airports - Ahmedabad, Lucknow, Jaipur, Guwahati, Thiruvananthapuram and Mangaluru - for 50 years. GMR, which handles three airports - Delhi, Hyderabad and Goa - is the only other airport operator handling more than one airport.
While discussing the proposal to lease out the six airports of the Airports Authority of India (AAI), an appraisal note by the Department of Economic Affairs (DEA) had suggested that not more than two airports be awarded to the same bidder, 'duly factoring in the high financial risk and performance issues'. However, the note was ignored during bids and Adani has won all the six airports offered in this round.
The DEA appraisal also argued that awarding them to different companies would facilitate yardstick competition and that 'in case of project failures there would be capable bidders available'. Business Today has a copy of the appraisal note.
CCI Chairman Ashok Kumar Gupta tells Business Today that sectors which are more innovation-driven and technology-based may be more concentrated, and in some instances, may give rise to monopolies. "Platform markets in the digital space may have a tendency to 'tip' in favour of a single market player as a result of network effects," he says.
The Indian anti-trust regulator recently ordered an inquiry into a complaint against Google for 'pre-installation and prominence of Google Pay on Android smartphones', search manipulation and bias by Google in favour of Google Pay, etc. Earlier in 2018, the CCI found Google violating the provisions of competition law for abusing its dominant position in the online search market and imposed a penalty of Rs 136 crore.
Recently, the US Federal Trade Commission, an independent consumer protection agency, has sought the break-up of Facebook, asking it to sell Instagram and WhatsApp. It alleges that Facebook buys out rivals to curb competition and kills start-ups that it cannot buy by limiting access to its tools. Being a dominant social media player, Facebook's failure to curb fake news and hateful content have also invited a lot of criticism across the globe as well as in India.
Globally, in 1984, US-based AT&Ts local telephone service was broken up into seven Baby Bells, giving consumers access to more choices and lower prices. However, by 2018, most of the Bells were together again as a single company called AT&T, which is currently the worlds largest telecommunications firm.
CCI chairman Kumar points to 'natural monopolies in the provision of utilities such as electricity, gas, water, etc'. In utility services, the markets are not contestable, he says. "However, if the provisioning is unbundled, some segments such as generation of electricity are amenable to competition. The role of a competition regulator in these markets is to ensure that monopoly service providers do not abuse their market powers."
In July last year, Mumbai residents complained about a sharp increase in electricity bills after Adani group took over retail electricity distribution from Anil Ambani's Reliance Infrastructure. As people took to social media airing their grievances, Adani Electricity Mumbai Ltd issued a clarification that work from home along with prevailing weather conditions had resulted in an increase in electricity consumption.
The Good, The Bad And The Ugly
So, what is wrong with a company growing bigger than the rest through hard work, smart strategy and better technology adoption?
Why would one fault Reliance's Retail strategy of using its telecom subscriber base to reach out to a larger market or Pidilite's strategy of targeting carpenters, educating them about the benefits of its products and then skilling them to use those to create a demand in the market (Pidilite has a 70 per cent share in the adhesive market)? Or could one blame Adani for its vertical integration efforts in the power sector, or for expanding its energy offerings by diversifying into the gas distribution business?
Indian competition law does not define monopoly, but it describes 'dominant position' as a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to operate independently of competitive forces prevailing in the market, or affect its competitors or consumers or the relevant market in its favour.
When asked by Business Today about the growing discomfort due to the emergence of monopolistic and oligarchic forces with the help of the government, a senior Niti Aayog official says, "They are just conjectures." He does not see any statistical evidence to buttress these claims. "These are fears that are being created to generate a false narrative," he adds.
According to competition experts, and market dominance do not always mean market abuse. Unless there is evidence of past misconduct of dominance, which is abusive and harming - for the market, other stakeholders and consumers - there is no justification for maligning a company or a firm.
A partner at a law firm says market monopoly in itself should not be a cause of concern for the regulator. "In case of competition law, without having any evidence of abuse the regulator should not try to discipline big companies just because it doesnt like them. This is not the intent of competition law," he says.
CCI Chairman Gupta says "possession of high market power is not frowned upon in the antitrust framework. Taking such a stance would damage incentives to innovate." The anti-trust watchdog, he says, follows a nuanced assessment where the facts of the case, the underlying market and technology take centre stage. "Our approach is calibrated in nature, so that intervention remains effective and targeted; it does not restrain innovation and would in turn help the market to regulate itself."
So while competition experts do not see companies with a higher share as an automatic threat to the rest of the market or consumers, stock markets also view them favourably in certain cases. Famously called economic moat, stock market analysts love the competitive advantage that a company has/likely to have over its peers.
Mukherjea of Marcellus Investment Manager says such companies are the source of investment, innovation and wealth creation. "Monopolists (or those with a higher market share), through intelligence and hard work, have built very high barriers for entry, which allow them to earn a return on capital of, say around, 40-45 per cent - three times the cost of capital.
Inequality And More
No matter how dispassionately competition experts or stock market analysts view the debate around monopolies, oligopolies, dominance and corporate biggies, a large section of activists and economists fear that not all dominance is being created through best business practices, strategies and innovations driven by technology.
"Western regulators paid a heavy price for blindly following the doctrine that monopoly itself is not bad, only its abuse is. Now, they are considering splitting up big tech companies. Our regulators seem to be not paying any heed and are turning a blind eye towards some disturbing monopolistic tendencies across sectors," says Shiju PV, Senior Partner, IndiaLaw.
According to an Oxfam India spokesperson, in certain cases, large corporations do influence policy initiatives. "Let us not forget that it was not too long ago that India was ranked ninth in crony capitalism by The Economist," he says.
An OECD discussion paper on market concentration suggests that in many markets, firms that have built market power, perhaps through innovation or efficiency, and have capitalised on the success by engaging successfully in lobbying and rent-seeking for regulatory protection. The paper also hints that regulation and (poll) campaign spending are responsible for an increase in mark-up of 1-2 per cent. Mark-ups measure the extent price exceeds the marginal cost, and an increased mark-up suggests a firm has a better ability to raise and maintain price above the level that would prevail under competition.
Economist Geeta Gauri, also a former member of the CCI, says a competition regulator can intervene as long as the barrier is created by the firm, but cannot do anything if the barrier is created by the government. She even goes on to say that if the government wants to favour national champions, it is a political decision, and the regulator cannot do much about it.
The process of consolidation would be expedited once the suspension of the insolvency law is lifted in March and more bankrupt companies come up for sale. More companies would be up for grabs when the government expedites its privatisation of some of the profitable public sector units (PSUs).
More churn and disruption is likely to happen across India Inc. over the next couple of years, as companies with weak operational and financial capabilities make way for better run or 'better-connected' companies. But whether they tilt the balance in the market in their favour only time will tell.
(With inputs from Ajita Shashidhar)
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