However, runaway inflation is threatening to spoil the party for the government, which only recently seemed to smell of roses after a wonderful election-year Budget. With all political effort on bringing down the Wholesale Price Index (the perceived rate of inflation officially reported is lower than reality, considering that the inflation rate that gets reported widely is not the Consumer Price Index), it is but natural that the government would train its vision on the constituents of that index. |
The conduct of senior government executives is further feeding the panic. First, the government indulged in what is called "moral suasion" (a la central bankers, who talk banks into lending more or contracting credit) to talk down prices, particularly in the cement and steel sectors. Then, it went on to being plaintive. Finally, the threat of investigations by the Monopolies and Restrictive Trade Practices Commission were held out.
Economics is about how human behaviour reacts to circumstances and signals of reasonable expectations, and the perception of government is that it is not in control of the situation. This column will not pretend to spout economic theories.
However, it hopes to make a point about serious regulatory failure that has resulted in the government lacking the regulatory framework to deal with the situation, if the government's belief of price-fixing being rampant, is indeed correct.
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If there were one singular regulatory failure in the system over the years, it has been in the space of competition regulation. When the Monopolies and Restrictive Trade Practices Act ("MRTP Act") was amended in 1991 to delete the provisions prescribing government approval for "concentration of economic power", the lawmakers did not repeal the provisions governing restrictive and unfair trade practices. It would have been politically unpalatable and internationally shameful to be seen throwing out the baby with the bathwater.
However, in practical reality, there has been hardly any noteworthy contribution by the MRTPC. The mid-1990s indeed saw the MRTP Act being the weapon for waging corporate war, particularly in consumer goods categories "� so very often, soap wars and toothpaste wars reigned supreme in the mid-1990s, but that too stopped making headlines after a point.
Early this decade, a merchant banker had narrated a story to me about how an Indian industrialist had told his counterparty team during an acquisition negotiation, that he had to leave the meeting early that day because he had to attend an important "cartel meeting". The European counterparties were reportedly mixed in reaction. The European lawyers kept studying their shoes intently but their commercial team-mates were quite amused and wanted to know the margins the industry would earn over the next quarter. While this is hearsay, it is hard to disbelieve.
The Competition Act, 2002 ("Competition Act") got passed, but has been stymied with myriad legal issues. Quite draconian in its ambit and scope, the law was bound to face the stiffest opposition. The debate over the regulations that are being proposed under the Competition Act, mainly centre around the horrendous problems they threaten to pose to the mergers and acquisitions activity.
There is a lot to be said about the draft regulations governing combinations and mergers. They also pose very difficult implications in their interplay with the Securities and Exchange Board of India's ("SEBI") takeover regulations. However, there is hardly any commensurate debate over the provisions that seek to deal with price-fixing and cartelisation.
It is the regulatory failure to notice, detect and curb cartel conduct over the years that is stark. Hardly any homework has been done in the system. Institutional memory is faint.
Over time, government officials who had experience have quit the system. Again, the complete absence of private action, thanks to the terrible track record of the judicial system in the pace of litigation resolution, has meant that regulation of anti-competitive practices has remained stunted.
Therefore, if ministers now rattle sabres and threaten probes by the MRTPC, merely because inflation is rising high, there may not even be any regulatory bandwidth to really check if there is a case for legal action, and to warn the government to go easy on rhetoric. Often, when governments change and the stock market indices fall, Sebi has been pushed to launch probes, take action and report to Parliament. Action taken to demonstrate teeth without there being substance to chew on, has often led to loss of face to regulators, when courts uphold challenges. This is also a dangerous time "� to prove how regulators have teeth, overzealous investigators could unleash havoc on the market system. Again, securities market regulation provides numerous precedents. The legal system governing competition has all the ingredients to follow suit "� bad legal action can only harm competition regulation and its credibility and prove counter-productive. If anti-competitive practices are indeed rampant, there is an institutional vacuum to bring it to book. For now, the government resembles a child who has not studied until the night before his exams.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)