Transfers of power

On May 2, Business Standard published a report delineating three markets in which successive waves of consolidation were likely to create two- or three-horse races: Telecom, steel and ecommerce. In the first, Bharti, Idea-Vodafone and Reliance Jio account for almost 70 per cent of subscribers; in the second, Tata Steel and JSW could corner a third of the steel market; in the third, Walmart and Amazon are likely to divide the stakes between them, when the former invests in Flipkart.

The key and perhaps ironical point about this constriction of competition is that it is taking place not in the bad old days of the licence raj when monopolies reigned despite the existence of a Monopolies and Restrictive Trade Practices (MRTP) law, but as a result of institutional disruptions and policies in the post-liberalisation era.

In telecom, the failure to transit early to a model in which service providers had to pay competitive prices for spectrum lies at the heart of the recent shakedown. The allocative regime that involved a low licence fee and revenue share with the government played its part in creating one of the world’s largest telecom subscriber base. By the mid-2000s, India had become a “telecom play” for global business, foreign investors from the UK, Russia, Singapore and Malaysia tied up with all manner of local businesses for a piece of this pie.

That pie turned to ashes when the Comptroller and Auditor General’s discovery that allocation rather than competitive price discovery cost the government crores in foregone revenues. It is now evident that those estimates were overblown, but the subsequent scandal pushed out an incumbent regime. The CAG’s report, however, also left the telecom industry burdened with huge bank borrowings as the Supreme Court in 2012 abruptly cancelled all licences and spectrum allotted in 2007, for reasons that were not clear (except that it seemed to imply that all parties were guilty).

In the subsequent auctions, the cost of spectrum soared, though nowhere near the ~1.76 trillion the CAG said the government could earn. Subscriber tariffs, though, stayed immobile under competitive pressure. Jio, with its aggressive entry pricing (virtually free for some six months), changed the competitive dynamics in quick time and certainly played a role in the merger between Idea and Vodafone, and the virtual free sale of Tata Teleservices to Bharti Airtel.

It is worth noting that Jio’s pricing formula may not have stood scrutiny under the old MRTP law. Market dominance and preventing concentration of economic power were the focus of the MRTP commission. Under this rubric, also it took the “restrictive trade practices” part of its mandate so seriously that all it needed was for a complaint from an aggrieved competitor for the commission to strike down discounting and freebie strategies, to the constant frustration of consumer goods makers.

The principal remit of the replacement Competition Commission of India (CCI), however, is to promote competition. Accordingly, when Bharti Airtel complained to it about Jio’s “predatory pricing” the CCI rejected it on grounds that in a competitive market with big players it would not be “anticompetitive for an entrant to incentivise customers towards its own services by giving attractive offers and schemes.” Subsequent rulings by the telecom regulator have defined predatory pricing but not in ways that address incumbents’ Jio-phobia.

Steel, the champion in the bank bad debt stakes, has been another victim of policy vagaries. Little of this is connected with the industry directly (in fact, antidumping measures have protected it); instead, it has been a serial sufferer of flawed public infrastructure policy. The public-private partnership model that underwrote the United Progressive Alliance’s infrastructure plans drove the overinvestment in capital goods in general and steel in particular. PPPs proved a non-starter for a raft of reasons from land acquisition failures to contractual glitches, and the economic slowdown under the National Democratic Alliance left steel makers with a contracting market and huge borrowing.

Note the irony again. Before the nineties, the steel industry, subject to price and distribution controls, was dominated by two players, Tata Steel and state-owned Steel Authority of India. Post-decontrol, capacity additions plus acquisitions under the bankruptcy resolution process have helped Tata and Jindal-controlled JSW could well own more than a third of the market. Add in SAIL, and the three will command more than half the industry capacity.

It is in the hip new business of online commerce that the question of competition and consumer choice comes home to roost. The initial absence of an e-commerce policy (especially the failure to reconcile local tax issues) and then the introduction of a highly restrictive policy has dissuaded the growth of domestic competition. Player either merged or exited, eventually narrowing the competition to Flipkart and Amazon. If Walmart buys a majority in Flipkart, it will still be a two-horse race. If Amazon buys a majority in Flipkart, as reports suggest it may, Indian ecommerce will have one large, dominant player (unless the CCI has something to say about that).

Call it the ructions of reform but it is difficult to escape the conclusion that in several key industries, the only difference between the licence raj and today’s liberalised business environment is that the dominance of public sector behemoths, the outcome of an economic ideology, is being replaced by the dominance of the private sector giants, the result of ill-considered policy.