In what ought to have been headline-grabbing news (though, surprisingly, it didn’t grab any headlines), the Competition Commission of India slapped a fine of Rs 6,300 crores on 10 cement companies and severely censured them for cartelisation.
Among the 10 companies, four – ACC, Ambuja Cements, Ultra Tech Cement Ltd, and Jaiprakash Associates Ltd – were the worst hit with fines of over Rs 1,000 crores each. The CCI also fined the cement lobby group Cement Manufacturers Association a small amount for abetting the collusion.
The penalties came on a complaint of the Builders Association of India to the CCI alleging that the cement companies were indulging in collusive price fixing. Along with price fixing, the CCI found that “the cement companies used the platform provided by CMA and shared details relating to prices, capacity utilisation, production and dispatch, and thereby restricted production and supplies in market, contravening the provisions of the Competition Act, 2002”, reads the official press release.
The complaint and the case go back to 2006, when the CCI was not in force. It was the Monopolies and Restrictive Trade Practices Commission that took cognisance of the complaint and launched an investigation. The Monopolies and Restrictive Trade Practices Commission was replaced by the CCI in 2009 and the latter gave its judgement in 2012. This was followed by appeals to the Competition Appellate Tribunal, which asked the CCI to take up the case afresh, which resulted in the latest order on August 3, 2016.
An interesting aspect of the order is the thorough investigation conducted by the director general of the CCI and the detailed and transparent report it published of its findings.
While there are around 42 cement companies in India, the CCI found that the top five companies have around 50% of the market share. The investigation done by the CCI revealed that the prices of the 10 companies in question moved in tandem in all the states. The cost-to-sales ratio also revealed that all these companies were earning super normal profits. While profits are good for any industry, the presence of super normal profits usually indicates an oligopoly or a collusive market structure.
Furthermore, it was established that the top cement manufacturers were “controlling the supply of cement in the market by way of some tacit agreement”. The companies had regulated their capacity utilisation during this period by restricting their output (decreasing supply) to maximise their profits by keeping the price of cement artificially high. The decisions on the quantity of output to produce were taken in a coordinated manner by the cement manufacturers.
This is where the Cement Manufacturers Association came in. The association was found guilty of providing a platform for the collusive behaviour. The members would coordinate their decisions through various formal and informal channels of communication. The association would continuously collect data from different nominated centres on the production, prices and dispatch of the output and make it available to all members. The members used this data to make output decisions, thereby colluding on price and quantity of output produced.
Departure from a regressive past
For those who have been following the nature of competition in the Indian economy and the role of the government in markets, this is an extremely refreshing move by the CCI. For a few decades after Independence, as India shied away from capitalism and embraced socialistic principles, the Indian industry was subject to regressive draconian laws such as the Monopolies and Restrictive Trade Practices Act, which was responsible for the perpetual underdevelopment of manufacturing in India. Even after the 1991 liberalisation, while the Act itself lost tooth, the Monopolies and Restrictive Trade Practices Commission continued to exist and heard cases on matters of anti-competition behaviour from industry, until it was finally abolished and replaced by the CCI.
Not specific to the commissions, the government usually takes an arbitrary approach while dealing with any complaint regarding high prices. If there is a concern among the population regarding high prices in any sector, instead of conducting a thorough investigation regarding the market structure and the behaviour of the participants in the market, the government usually goes for simpler, yet ineffective, solutions such as imposing a price or output control. The government has been guilty of not understanding the economic reasoning behind the high prices and flexing its muscles through some regulatory channels by setting completely ad hoc price ceilings and price floors, which end up having disastrous, unintended consequences.
This time, however, perhaps due to the absence of any direct voters’ pressure, the entire issue has been handled professionally by the CCI, and entirely under the ambit of the law. The complaint mechanism, the thoroughness and transparency of the investigation, and the fines imposed were carried out professionally. While this particular case will go on for a few years before the cement manufacturers end up paying the fines, this step will go a long way in creating a precedent for actions on anti-competitive behaviour. Ultimately, the role of the government in markets has to be clearly defined: acting as an umpire and facilitating all the necessary conditions for the existence of high competition in any sector. For high and sustained growth, India needs a well-functioning market and an alert watchdog to keep the deviants in line.
Anupam Manur is a policy analyst at The Takshashila Institution, an independent and non-partisan think tank and a school of public policy.