Advocates of reform would however
argue that, while some mistakes were made in the early stages of reform
in the telecommunications industry, the reconstitution of the TRAI
and recent revisions of policy would set things finally right. If
the TRAI plays the role of watchdog appropriately, it may. Otherwise
it would not, as experience elsewhere indicates. This is because competition
even if temporarily ensured, as it seems to have been in the telecom
sector, could soon lead to oligopolization. This is illustrated by
the experience of the cement industry, which has for some time now
been freed of restrictions on entry as well as controls on prices.
Liberalization did initially spur competition, which led to increased
capacity, an improved demand-supply balance and better prices for
the consumer. Cement production rose from 49 million tones in 1990-91
to 88 million tones in 1998-99, because of a wave of capacity creation
in the wake of liberalization. However, with public investment depressed
and growth in the construction business slowing, the industry came
to be characterized by excess capacities and depressed prices. To
help the industry the government stepped in with protection from international
competition with a basic customs duty of 38 per cent, a special additional
duty of 4 per cent, an anti-dumping duty of Rs.10 per tonne and a
countervailing duty of Rs. 350 per tonne.
Behind these protective barriers
the demand-constrained industry has been witnessing a substantial
change in structure. The industry has seen a process of growing consolidation
of capacity in a few hands as a result of a spate of mega-mergers
and acquisitions. Leading the movement has been international cement
major Lafarge of France that has acquired the cement businesses of
Raymond and Tata Steel and is reportedly gearing up for an acquisition
of Jayaprakash Cement. But there have been others in the game as well.
Gujarat Ambuja has bought out the Tata stake in ACC for Rs. 925 crore,
India Cements has acquired Raasi Cement and Italcementi has acquired
a 50 per cent stake in Zuari Cement. All this is occurring in an industry
where already capacity with the top six players accounts for more
than 60 per cent of total production, though there are 60 companies
and 120 plants in the industry.
Acquisitions such as these may be
dismissed as inevitable in a more market-driven environment. But what
is disturbing is that the process of consolidation has been accompanied
by growing evidence of monopolistic practices. The demand for cement
picked up in 1999-2000, as reflected in the 20 per cent increase in
output during the first eight months of that financial year. Using
the occasion, as well as the base for collusive practices that concentration
in capacity affords, producers have consciously jacked up cement prices.
Prices which were slack till about November last year, have been escalating
rapidly since, as leading producers repeatedly hiked prices supported
by measures aimed at reducing supply and creating an artificial shortage.
Thus in November, these producers had decided to shut down capacity
for 35 days more than the 25 during which capacity is normally shut
down for maintenance purposes. Restrictions on the distribution of
cement have also reportedly been adopted by what is quite clearly
an organized cartel. With the support of of such measures, prices
were hiked by 36 per cent in five successive revisions during the
last two months of 2000, taking the Mumbai price of cement from Rs.
140 a bag to Rs. 190 a bag. Other markets such as those in Andhra
Pradesh, Tamil Nadu and Kerala have witnessed similar increases.
The large increase in price over
a short period of time has met with an adverse response from the building
industry. The Builders Association of India has called for intervention
by the government in the form of import duty reductions and price
regulation and the Department of Company Affairs has reportedly instituted
an inquiry. The fact, however, remains that liberalization has done
away with many of the instruments that the government has at its command
to deal with cartels of the kind that have formed in the cement industry.
Reform not only engenders monopoly, it provides greater leeway to
oligopolistic firms to exercise their market power.
The difference between the situation
in the cellular and cement industry is worth noting. Though a new
industry, cellular operators have used the same strategy as the traditional
oligopolistic groups that flourished during the import substitution
years. Just as the traditional oligopolistic structure used the licensing
system as a means to prevent the entry of new players into their bases
of monopoly power, the cellular operators used the State including
the official regulatory authority to preempt entry and charge tariffs
that ensured high profits. The cement industry, on the other hand,
has seen the emergence of oligopoly as a natural result of unbridled
competition. And the withdrawal of the State in the wake of deregulation
has helped those oligopolies to protect and increase their profits.
The cement experience suggests that
even if recent policy decisions have helped reduce the strangehold
over the market of the early entrants into the cellular industry and
widen and intensify competition, this is no guarantee against subsequent
oligopolisation. What remains to be seen is whether the reconstituted
TRAI would be able to prevent those oligopolies, when they emerge,
from reaping unfair benefits from their market power. Even if that
happens, the lesson is clear. Markets freed by reform breed anti-competitive
practices. The State must come in to prevent them, as it must in the
case of cement.