You spoke of how the “trust-busting” of the Big 5 could be an awkward exercise and have offered the alternative of greater ownership of equity of companies acquired. Could you elucidate this?
Even though the coverage of the Brookings report (authored by Acharya) focused on the headline that I am recommending the breaking up of the ‘Big 5’, I have explicitly said that this has to be done by the Competition Commission of India. In fact, I will be presenting my report to them in the near future. There are a few graceful ways of reducing market concentration. If you don’t want to restrict their further growth or market share, one way is to be sure that they have enough skin in the game and only efficient concentration is taking hold in the economy.
How do you do that?
In the US for example, it is required that if you want to consolidate a subsidiary in your balance sheet to be able to offset profits and losses, a conglomerate has to have 80% equity ownership at each layer of the pyramid. You do not want a conglomerate to just get a toehold somewhere, say by buying a small 20% stake just enough to control the company, and deter competition. I am also concerned that a few of these conglomerates, not just the Big 5, but even the Big 6-to-10 have rather high debt on the balance sheets. We need to be confident that the Insolvency and Bankruptcy Code (IBC) can deal with them in case there is a default of a subsidiary or the holding company. Because large firms have such complex group structures, maybe we could require them to produce what is being called ‘living wills’ elsewhere in the regulation of systemically important financial institutions (SIFIs).
There is an argument that Indian companies do not have pricing power, especially in globally traded products. How would you respond?
I understand that 80-90% of the responses are disagreeing with what I am trying to say but I’m heartened by the fact that there’s a voice on the other side. What I document in the Brookings report is that the Big 5 – which are the largest conglomerates – are showing increasing concentration, and as is typical in such scenarios, their mark-ups are higher, on average, relative to other firms in the sectors where they operate. The “mark-up” is the price that a company is charging over and above its input costs. The mark-ups we analyse are estimated from balance sheet data using state-of-the-art methods. What the methodology roughly does is this: it looks at the balance sheets of firms across the sector and tries to assess what’s an average production frontier in the sector.
Which are the specific sectors?
There are some sectors where this is specifically the case. Basic metals and non-metallic products such as cement, for example. These two stand out. This is an important point. It means that if global prices are coming down in these sectors, Indian companies are not bringing down their prices as much because mark-ups are high, e.g., in metals, cement, etc. These are also intermediate inputs in other sectors. They influence the cost of production and prices in other sectors through input-output linkages across sectors. Therefore, it is not just the inflation in the concentrated sectors that could be lower without higher mark-ups. Inflation in other sectors could be lower as well.