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Of cement, cartels and corruption
January 17, 2008
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." -- Adam Smith in The Wealth of Nations.
Ever since the Tamil Nadu government announced its intention to take over the cement companies in the state, it has set the cat amongst the pigeons. This announcement, in the first week of January 2008, has once again brought the nexus between politicians and big business in India into sharp focus.
Readers may recall how the Tamil Nadu government had sent out an ultimatum to cement companies operating within the private sector in Tamil Nadu, in the first few days of the New Year. Displeased at their tactics in keeping the prices of cement artificially high, the government warned that these companies should work to bring down the cement prices. As an alternative, it suggested that the government could move in and nationalise these companies.
However, knowing how governments work, the cement industry in Tamil Nadu was dismissive of the threat from the government. It maintained that prices were determined by market forces and higher prices were on account of the gap in the demand and supply of cement.
Industry insiders pointed out that the unprecedented boom in the construction and infrastructure sectors has created a huge demand-supply gap pushing up prices of building materials. With the prices of virtually all inputs used by the building industry shooting through the roof in the past few years, it is strange that the government chose to get at the cement industry alone. And therein lies the catch in this entire sordid drama, played in full public glare by the Tamil Nadu government and the cement industry.
What the MRTPC found out in 2007?
However, at this point one must hasten to add that what adds legitimacy to the announcement of the Tamil Nadu government is a report following an internal investigation of the Monopolies and Restrictive Trade Practices Commission, which revealed cartelisation leading to 'exorbitant' increase in cement prices.
The director general of investigations and registration, in its report submitted to MRTPC, said that the cement manufacturers' association was instrumental in fixing prices in the sector.
"Cement manufacturing companies have got a forum of CMA to meet together and discuss marketing strategies, including prices, so as to increase the prices without any fear of competition from other members of CMA," DGIR said in its preliminary investigation report, and added that this "amounts to an informal agreement among the cement manufacturing companies on the terms and condition of sale of cement to consumers."
Subsequent action by the MRTPC to send notices to some of the cement companies is to be seen merely as a 'measure' taken by the government to rein in cement prices. Further, the MRTPC in 2007-end ordered cement manufacturers to stop cartelising. Further, it castigated Indian cement players for acting through a cartel in union for 17 years � yes, 17 years!
Obviously, this lends legitimacy to the claims of the Tamil Nadu government that the cement prices in Tamil Nadu are 'rigged,' its threat of takeover legitimate and its subsequent actions to deal with the situation politically correct. It may be noted that the price of cement in Tamil Nadu (perhaps in other states too) is approximately 50 per cent higher then the landed price of imported cement.
Apparently such a high price differential between the international prices and the domestic prices is prima facie indication that all is not well within the cement industry. Crucially, it highlights the soft underbelly of the Indian economy.
Remedy worse than the disease?
As the prices of cement remained high the state government was forced to act. Within days of issuing the takeover threat, as this goes to press, it is understood that the Tamil Nadu government has accepted a 'proposal' from the cement industry, ostensibly aimed at bringing down prices of cement in the state.
And the proposal -- especially one concerning supplying 14,00,000 bags per month at reduced costs to the 'weaker sections' of our population and buying cement for construction of houses between 500 sq. ft to 1000 sq. ft -- (not more not less) is indeed comical in its design, unworkable in the Indian context and smacks of 'convenient posturing' all around.
Apparently, the tough act was aimed at the gallery. And given these solutions one is sure cement prices are not going to go down in the immediate future. On the other hand, if the government had floated a worldwide tender and imported substantial quantity of cement, it could have been effective in breaking the cement cartel within the state.
Naturally, as solutions are not aimed at dealing with the extant issue -- i.e. bringing down cement prices, questions arise at the very motive of the government in raising the issue of cartels in the first place.
Cartels and corruption
Needless to emphasise, cartels are one of the most pernicious forms of practice within any industry. Globally, cartels are viewed seriously and governments go to extraordinary lengths to break cartels. Some have prescribed custodial sentences for individuals, while some have provided authorities with power to tap phones as well as conduct raids to unearth evidence of cartels.
Further, many countries have provided for a whistle-blowers policy in their respective competition law that enables participant of a cartel to come clean and thereby benefit from a leniency programme. And despite all this, many cartels function without any let up or fear.
India is not new to cartels, which exist virtually in all manufacturing and service industries: from the ubiquitous taxi or auto-rickshaw to the cement or insurance firm. But what would make our cartels unique is that they function with the tacit approval of the powers that be. In fact, cartels are the manifestation of the unholy nexus between the politicians and big business.
If it is the cop or the next door auto-driver at the street level, it is the combination of big business houses and powerful politicians who debilitate healthy competition at the macro level, leaving consumers like you and me poorer. In a country where policy 'U' turns by governments are not uncommon, simply because of the diktats of big business houses and its proximity to powers that be, one is sure that no law would be able to break cartels.
Naturally, as the Tamil Nadu government extracted a delightfully vague promise from domestic cement firms, it seems to assure everyone that it has done its very best to tackle the issue. But, it has not. The shrillness with which it raised the issue of cement prices and quiet surrender to the cement lobby in the next few days are a study in contrast. It points out to something more sinister than meets the eye.
The threat of takeovers, especially given the precarious state of finances of the state government, is a non-starter when it comes to dealing with cartels. And as the intervention of the Tamil Nadu government in sand quarrying has shown, state acquisition of any industry can be as disastrous as private sector cartels.
Obviously the stand of the government was a ruse to do something different than what was publicly understood. This suspicion is further strengthened by the alacrity with which the cement industry came up with a proposal, and the speed with which it was accepted by the government.
Who is the ultimate beneficiary of all this is anybody's guess. Be that as it may, one thing is certain; the ordinary people of the state are not anywhere in the government's radar.
To conclude, neither Tamil Nadu nor the cement industry is an exception in the Indian context. Rather they are the rule and represent the dirty cartel between our politicians and industry. And it is this cartel that is responsible for many of the ills plaguing the Indian economy.
This unholy nexus is omnipotent and omnipresent, beyond the purview of any reforms process. And that explains why the cement cartel exists virtually untouched by any law in India for the past 17 years and gets away with whatever it does, like it has in Tamil Nadu.
Remember, the business of a politician is business. The business of business is managing politicians!
The author is a Chennai based Chartered Accountant. He can be contacted at firstname.lastname@example.org
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