Published: Business Line, 12 January 2005

By Pradeep S Mehta

Cartels operate across the economy, particularly in the intermediate goods and services sector. They hike production costs, thus making finished goods less competitive. The Finance Minister could launch a `competition audit’ across all sectors to weed out such unhealthy practices.

THE Minister for Steel, and Fertiliser and Chemicals, Mr Ram Vilas Paswan, should push for the installation of the new Competition Commission at the earliest, agitated as he is with the lack of competition in two of the sectors he handles ā€” steel and drugs. In “Why a steel regulator makes little sense,” (Business Line December 17), I had argued why a competition authority would be the antidote to the cartelising behaviour of the steel industry, or for that matter any sector. Take the case of pharma retail trade that has agitated the Minister, and the consumer community. For years, the trade has squeezing out huge commissions.

A CUTS (Consumer Unity and Trust Society) study on developing a “Functional Competition Policy for India” found that cartels exist everywhere and not just in the pharmaceutical sector. But in this sector it is not so much the manufacturers as the trade which calls the shots. Conventional economics says that a large number of players and a large number of buyers assure perfect competition. But the pharma sector beats this logic. Why?

In India, though there are 20,000 pharma manufacturers, there are nearly eight lakh retailers. These retailers are said to dictate to the pharma companies what number of stockists a company should appoint; how many brands or its combinations should be available in the market; what should be the free samples policy and so on. Liberal margins are demanded and offered by the pharma companies on generic drugs, even up to 2000 per cent.

In 1984, the Retail and Dispensing Chemists Association, Bombay, was brought before the MRTP Commission after it directed all wholesalers and retailers to boycott a company’s product till the Association’s demands were met by the company. The Commission observed that the impact of the chemists’ boycott could by no stretch of imagination be considered negligible. The boycott represented an attempt to deny the consumers certain products to which they are accustomed and, therefore, the hardship to such consumers was patent. The Commission passed a `cease and desist’ order (RTP Enquiry No. 10/1984).

Even before that, in 1982, the All India Organisation of Chemists and Druggists (AIOCD) had to face a similar fate (RTP Enquiry No. 14/1982, order dated September 25, 1984). The AICOD was hauled up before the Commission once again in 1983 when it issued a circular to various pharmaceutical companies threatening that if they dealt with the State cooperative organisations and appointed them as stockists granting them sale rights, it would expose the companies to a boycott by its members. The case was decided in 1993 and the Commission struck it down as a restrictive trade practice of `refusal to deal’ (RTP Enquiry No. 37/1983, decided on June 25, 1993).

Now the government has decided to set margins under the Drug Price Control Order, 1998 to cap trade margins: For generic drugs, 35 per cent for retailers and 15 per cent to wholesalers, and for drugs sold under brand/trade names, 20 per cent and 10 per cent respectively. The trade is protesting loudly, but hopefully the government will remain firm.

Usually cartelising is indulged in by producers rather than buyers.

What could be of potential concern for India is a case study from Hong Kong, when two large department stores boycotted some consumer goods, for them to stop supplies to smaller stores.

Cement is a sector that has a tendency to cartelise, all over the world. In Europe, action was taken against the cement manufacturers association too, because it had coordinated the concerted collusion. Cement involves heavy freight costs, and hence the cartelisation is done regionally.

In 2001, the Builders’ Association of India, Mumbai, resorted to the boycott of cement companies, faced with a recalcitrant producers’ cartel. Two enquiries before the MRTPC still remain unresolved.

In 2004, regional imbalance in the matter of a cartel in the supply of pre-stressed cement sleepers came under the scrutiny of the Standing Committee on Railways. “The Committee note that the procurement of concrete sleepers have become a very sensitive matter because a lot of unscrupulous existing manufacturers have formed a cartel to secure orders by unfair means or tempering (sic) with procedure and simultaneously keeping the new competitors out of the race. The Committee are constrained to notice that there exists a regional imbalance in the setting up of concrete sleeper manufacturing units. They also express their unhappiness that new entrants are not encouraged which ultimately strengthen the cartel of old/existing manufacturers.” In procuring 160 lakh broad-gauge sleepers for 2003-05, the Railways awarded contracts to the existing 71 firms, and ignored the new 24 firms.

A similar anti-competitive decision was taken recently when domestic private airlines were allowed to fly overseas routes, hitherto the preserve of the national carriers. But an entry barrier was created: To qualify to fly abroad an airline had to have five years experience. This would keep two new low-cost airlines which plan to acquire a major fleet out of lucrative routes.

Did a cartel manoeuvre this? For, the two national carriers have not been able to use the bilateral rights because they do not enough aircraft, or most of what they have are too old. In this, perhaps, the airline cartel saw an opportunity to consolidate its presence.

Cartels operate across the economy, particularly in the intermediate goods and the services sectors. Whether it is transmission line towers, electric cables, or construction and transportation… they hike up production costs, thus making the finished goods less competitive. The new Competition Commission of India, if it comes into being soon, has a huge agenda. The National Manufacturing Competitiveness Council too needs to flex its muscles, if it has to deliver results. Also, the Finance Minister, in his forthcoming Budget, could launch a `competition audit’ across all sectors to weed out unhealthy practices. The Comptroller and Auditor General should be roped into this project. The new Government has taken competition very seriously. It now has to deliver.