New Delhi: The pricing power by the “Big 5 companies” in India is possibly leading to persistent core inflation, former Reserve Bank of India deputy governor Viral Acharya said. The Big 5 he referred to are the Reliance Group, Tata Group, Aditya Birla Group, Adani Group and Bharti Airtel.
He said that industrial concentration by these top private players has allowed them to charge much higher product prices than their competitors, Business Standard reported.
While speaking at the NSE-NYU conference on Indian Financial Markets, he said: “The Big 5 are able to charge product prices that are substantially higher than other competitors in the market. In contrast, this is not true, on an average, of the top 5 (in various sectors). The implication is basically that the top 5, which are not (always) the Big 5, are not actually charging mark-ups that are systematically higher than others.”
“…what we are finding is that perhaps this is a component that’s actually driving some of the core inflation. We find that when input prices rise, if market power in an industry is high, the wholesale price inflation in that sector actually rises a lot more and then of course that eventually will feed into the CPI [consumer price index],” the business daily reported him as saying.
The event was held via videoconference.
At 6.44%, India’s retail inflation remained above the RBI’s upper band (6%) for the second month in a row in February. The retail inflation in February was slightly lower than in January (6.52%), data released by the National Statistical Office showed.
According to another Business Standard report, the price of food items like meat, fish, eggs and pulses as well as fuel and light had eased a little in February, but continued to rise for cereals (16.73%), milk (9.65%), fruit (6.38%) and housing (4.83%).
“The Big 5 are growing at the expense of the big 6 to 10. Just to give you a very concrete number here, from 1991 to now, the Big 5 business groups’ share of total assets rose from 10% to 18%. The Big 6 to 10 are the ones who have ceded space to them,” he said.
“This is about concentration at the very top in a sector rather than simply doing it for small firms to large firms. This is about making the industrial organisation very, very heavily concentrated at the Big 5. They now control around 18% of the non-financial sector assets and about 12% of the sales.”
Creating “national champions”out of big companies
The newspaper reported him saying that it’s “very clear” that at the current juncture, there exists an industrial policy of creating “national champions” out of the large conglomerates.
“…when it’s the same Big 5 companies that are becoming larger and larger in every sector of the economy, then it raises several difficult questions. You are creating national champions, they might be seen as too big to fail in credit allocations by banks and bond markets; they might be becoming so large that it becomes very hard to understand their related party transactions,” he said.
“They become very opaque, complex, many of these as we know are run by family firms. You then have key men or key women or key family risks because ownership in India is very very concentrated,” he said.
Former RBI governor D. Subbarao asked him, per the newspaper, as to whether his paper was driven by a degree of prescience about the Adani-Hindenburg episode. Acharya replied to him saying that he had started research on the topic of industrial concentration before the events occurred.
“The real deeper reason why I got interested in this was because of my stint at the Reserve Bank of India. I got to understand Indian inflation and its data at a much more micro level,” he said.
“I’m finding that the core inflation in India has become too persistent, it’s just not budging from 6 per cent. Inflation expectations have risen which is usually a corollary to core inflation staying high for a while, because then it starts entering wages,” he said.
Risks of economic concentration
The concerns over economic concentration were also echoed by Nouriel Roubini, professor emeritus of economics at New York University’s Stern School of Business and author of MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them, in an opinion column on Mint.
He said that “India has moved to an economic model where a few ‘national champions’ – effectively large private oligopolistic conglomerates – control significant parts of the old economy.”
He added that this pattern resembles Indonesia under Suharto (1967-98), China under Hu Jintao (2002-12) or South Korea in the 1990s under its dominant chaebols.
Although he said that this concentration of power has served India well, he added that the dark side of this structure is that these conglomerates have been able to capture policymaking to benefit themselves.