Thursday, June 20, 2024

Business concentration may pose inflation risks

Sticky core inflation is a bugbear for policymakers trying to contain price escalation. As a measure that leaves out volatile fuel and food, its recent obstinacy in India—it was above 6% last month—has dampened hopes of relief raised by global oil and wheat moderation after last year’s war spike. The core typically heats up once an upshoot is no longer seen as a blip and prices get raised all around. But is there another factor at work that’s peculiar to India’ economy? Viral Acharya, former deputy governor of the Reserve Bank of India (RBI), argued some days ago that a concentration of economic heft may have enhanced the pricing power of a few private companies and queered the pitch for price stability. As low levels of rivalry tend to spell higher retail charges in theory as well as practice, his argument merits a closer look.

On key parameters, our industrial dispersal is worse than it was before New Delhi dropped its Licence Raj and opened up most of the economy. Since 1991, India’s ‘big five’ business groups—namely Reliance, Tata, Adani, Bharti and A.V. Birla—have seen their share of non-financial sector assets rise from 10% to 18%, according to Acharya, with the next five having ceded space to them. The big five not only account for 12% of sales, he said, but “are able to charge product prices that are substantially higher than other competitors in the market.” In his view, the effect of this ability can manifest itself in an inflationary scenario: “We find that when input prices rise, if market power in an industry is high, wholesale price inflation in that sector actually rises a lot more, and then of course that will eventually feed into the consumer price index.” While this is plausible, we would need a more rigorous analysis of price drivers across the big five’s fields of operation before any conclusion can be drawn. In the telecom sector, competitive intensity has ebbed and tariffs have risen in recent times. In a bunch of other markets, though, we have seen greater rivalry. Reliance, for example, is playing the price warrior with a new range of fast-moving retail items. Since the corporate dominance in question is only partially consumer-facing, an overall trend is difficult to identify, but studying it could serve more than an academic end.

Under the policy framework adopted by RBI in 2016, inflation is broadly taken as a function of excess money sloshing around our economy, with monetary knobs to be adjusted promptly in response, no matter what exactly is pushing up prices. So a test of Acharya’s hypothesis should not affect interest-rate decisions. Yet, the issue he raised has longer-term relevance, and that too, in a context larger than just price stability. Economic power held in fewer hands is a trend that calls for scrutiny even otherwise, especially now that the Centre has dusted off an industrial policy of self-reliance that favours it. “You’re creating national champions,” Acharya said, “They might be seen as too big to fail in credit allocation by banks and bond markets; they might become so large that it becomes very hard to understand their related party transactions.” He clarified that his caution wasn’t inspired by the Adani episode, but a close interest in price trends as a former central banker. Others who had access to RBI’s data trove have made other observations in the past. Subir Gokarn, for instance, spoke of food-price pressures emerging from a protein tilt in post-poverty diets. Such readings often do have explanatory value. But RBI mustn’t get distracted. It must go by its monetarist tool-kit.

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