The issue of inflation and inflation control has taken centre stage in India over the last several years. Despite extremely tight monetary policy as well as stagnating to weak global commodity prices inflation has not come into control. Small period of low inflation have been followed by long periods of high inflation. In the strong growth era of the period 2004-2007 one could have argued that high demand and lagging supplies could explain higher inflation. However the last two years have seen an absolute demand collapse in the domestic economy and as such it is not demand pull that is responsible for higher inflation. The obvious reasons of the social sector dole outs of the outgoing UPA government, high Fiscal Deficits and a weak INR combined with persistently high food inflation are the logical explanations for high inflation, however strong cartels that operate within the economy are also responsible for the persistently high inflation. Some examples of these cartels are as follows-
The Real Estate/politician nexus cartel- The real estate cartel is one of the worst in the country. The entire real estate industry operates under a shadow of extremely opaque operating structures, payoffs to politicians and local bodies, restrictive supply regimes which create artificial shortages etc. There is also an extremely regressive taxation structure related to both the sale and purchase of property where the registration charges and stamp duties are extremely high and force people to understate the value of the transaction as well as on the capital gains front where taxes are high and force people to understate the value of the transaction. Given high transaction costs and opaque approval structures Real Estate which constitutes the maximum allocation of savings among Indians (recent estimates put HNI allocation to real estate at 43% of savings) is poorly regulated. The Real Estate Regulation bill has still not been approved and implemented. As such lack of transparency and extreme political patronage has made real estate extremely expensive in most parts of India. The rental value of residential property ranges between 2-3% in most parts of India and 3-5% on commercial property. These returns are obviously not viable given the interest rate regime in India and reflect a negative carry. One of the flats that we owned in Mumbai started off giving us a pre tax rental yield of 7% in the year 2007, this fell to just 2.5% in the year 2012 as property prices rose and rentals fell. This is when we decided to sell it off.
Better regulation, ease of purchase and sale as well as better transparency will reduce the cost of homes for millions of Indians who cannot afford it today.
The Cement Cartel- This is one of the most open cartels in India. I still remember that couple of year's back I was sitting in the office of the MD of a large south based Cement Company when he got a call from one of his subordinates. The entire summary of the conversation was about how one of the other companies was increasing supplies despite their arrangement and was insisting on a higher quota. The openness with which this conversation was on really surprised me. Since then I have not invested into this sector.
Cement has been plagued with huge oversupply across the country, especially in South India. Demand has been weak and cost pressures have been high due to rising coal and fuel costs. Logistics costs have also risen due to rising diesel prices. However despite all of this we have seen huge stability in the EBDITA per tonne of most cement companies. Cement prices have fallen in some periods of time; however they have bounced back as fast. This has been despite large capacity additions and poor demand. Supply restrictions, pricing discipline is a well understood principle of this industry at this stage. If it had not been for this cement prices would have been much lower than they are today.
THE Tyre Cartel- Tyre oligopoly and pricing arrangements in this industry was a case study that we studies in our Management Schools nearly two decades ago. The same thing has made an appearance over the last couple of years. The Tyre lobby first got Chinese imports restricted and virtually stopped by putting some certification requirements on those tyre imports. As such Bus and Truck tyres which had seen a huge influx of Chinese tyres which had taken away more than 10% of the replacement market suddenly saw their exit. This was also the time when most tyre companies had embarked on a program of significant expansion expecting strong demand driven by strong economic growth. However as growth collapsed the demand for tyres also collapsed. On top of this the industry has been aided by the severe fall in input costs where rubber prices are off nearly 40% from their peak levels seen more than two years back.
Despite low capacity utilization, low input costs and poor demand the tyre prices in the market have held up, mostly due to some pricing arrangement. But for this prices would have been much lower.
The Power Cartel- The power sector cartel is largely a state owned one and not that of the private sector. Extremely poor inefficiency, large scale power theft and transmission losses combined with unfavourable power purchase arrangements from power producers makes us pay nearly 30-100% more than what we should actually be paying. The open sourcing and common carrier principle as envisaged under the Electricity Act is nothing but a joke. The power costs that household consumers and industry pays continues to rise despite the peak power deficit in the country now being just around 3% from a peak of nearly 15% a few years back. The power price on the electricity exchanges have collapsed to just around Rs 3 per unit & sometimes even below that. However despite that consumers are forced to pay higher and higher every passing year. The unbundling of most power utilities into generating and transmitting utilities happened several years back in most states. Despite that and despite investing billions into the supposed improvement of transmission systems power losses have not reduced in most states. As prices have risen the incentive for power theft has increased more and more.
There is need for implementation of the Electricity Act in letter and spirit. The supposedly independent power regulators need to act on the behest of consumers and stop approving tariff hikes every year without efficiency gains. Overall power tariffs in India should peak out and actually fall going forward instead of rising if these inefficient state cartels are broken.
The Agri Cartel- I will not go into details of the extent of losses of farm produce post production in India as this issue has been talked of and discussed enough in the past. The key is that despite increasing production every year, improving farm productivity and huge buffer stocks with the government food inflation has been very high in India over the last 5 years. One reason for this has been the continuous increase in support prices under UPA. However the bigger reason also has been the rampant food grain purchase by the government which then lets it rot and degrade instead of selling it to consumers at reasonable prices. The government has made no major move to improve the agri supply chain or break the cartels which operate under APMC acts. Food product inflation can only be controlled if the mark up from the production stage to the retail sale point moderates. However there are so many layers in the entire agri chain that this mark up has only increased over the last few years.
Then new government will have to work on this front strongly to control the CPI which has a weightage to food of 57% for rural CPI and 43% in Urban CPI.
Overall several cartels operate in India which keeps prices higher than what they should be. I might not have covered all the Cartels as many more might exist.
A proper control and operation of the Competition Commission of India along with strong punitive action by the government will help moderate prices and control inflation.