Slowly, more and more economic power is getting concentrated in fewer hands. An oligopoly is emerging.
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- Numbers tell the story: Look at who is cornering corporate profits, and you get a hint of how the economic power is changing in India. For 2020-21, only five top companies took 21% of all profits earned by all listed firms (up from a 17% share six years ago). In many sectors, the top five firms made more than 90% of the total profits. Pandemic has crushed the smaller firms brutally!
- Big getting bigger: India’s biggest companies are now getting even bigger, as the pandemic triggered a fight for survival for much smaller firms down the value chain.
- A total of 2,863 BSE-listed firms across 20 broad industries were considered in the analysis by media. In almost a third of these industries, the top five earned over 90% of the profits, as both technology and easier capital provided them greater competitive moat.
- In 11 of the 13 industries where the top five bagged 75% of the profits, the concentration has only inched up in the fiscal 2020-21, with the realty and infrastructure sectors recording the biggest jump. In terms of revenue dominance, infrastructure and power were the biggest movers.
- Trend existed, got strengthened: In a monetary policy meeting in 2020, committee member Jayanth R. Varma suggested that the “oligopolistic core" in several sectors had weathered the pandemic better, and could be well-placed to start exercising pricing power.
- The market dominance of a few players has grown since 2016, due to demonetization and the new goods and services tax (GST) regime
- Each of these factors has hit smaller companies to a larger extent, and market watchers feel such churns and disruptions are likely to continue to stir up further concentration in the economy
- Consolidation has paced up as high leverage cuts down efficiency, forcing many firms to either sell assets after being put through the insolvency process, or getting gobbled up by rivals
- Disastrous result: As a result, in some sectors, virtually no more than one major player remains, with the biggest entity alone accounting for half the industry’s revenue, as in the case of Larsen & Toubro in infrastructure (a rise from 47% to 52% share in four years). This is a monopolistic situation, and the Competition Commmission of India (CCI) watches helplessly. The government too is silent, and not interfering at all.
- Share of India's GDP: This profit polarization means large firms’ share in the country’s output is rising. Ten firms alone accounted for 1.1% of India’s GDP in 2020-21, a jump from 0.9% or less in the last three years. The 1,449 profit-making companies in the sample contributed 2.9% to the GDP in 2020-21.
- Rising domination means... : As big companies get bigger due to economies of scale, access to capital, people and technology, higher efficiency of operations making them more competitive globally, is happening. And with rising dominance, the top firms also form the vanguard of wealth creation on the stock markets. Just 16 firms accounted for 80% of the $1-trillion wealth created by the Nifty 50 over the last decade.
- The global scene: Growing corporate concentration is a global phenomenon today. US economists have said that benefits of greater market power may outweigh its social costs if the concentration was an outcome of new technologies that favoured larger-scale operations. For India, many feel that as long as the product or service retains quality, benefits consumers and prices are based on natural demand-supply forces, domination is not bad. What is bad is when a dominant company indulges in abusive market practices.
- CCI woke up: In January 2021, India’s antitrust regulator gave warnings about the vulnerable telecom industry descending into a duopoly: it said a strong, competitive sector augured well for new technology such as 5G, while a weak sector could discourage innovation.
- Summary: The pandemic may have set off the alarm bells for some other sectors, too. India is now witnessing a full-scale "trickle up" effect, where wealth, incomes, opportunities and market power get concentrated at the top of the social pyramid, instead of being distributed equitably. So is India an oligopoly now, where just a few share most of the economic power? The social implications of this down the line can be disruptive.
- EXAM QUESTIONS: (1) Explain how the Indian economy is now exhibiting signals of an oligopolistic structure. (2) What are the pros and cons of just a few firms dominating major sectors of Indian economy? Explain. (3) Differentiate between oligopoly and monopoly.
#oligopoly #CCI #competition #GST #demonetisation
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