MUMBAI: According to a former central banker, India’s largest conglomerates, which have enormous pricing power in the retail, resource, and telecommunications sectors, are a major cause of the country’s high inflation and ought to be split up.
Reliance Group, Tata, Aditya Birla, Adani, and Bharti Telecom, collectively known as the “Big 5,” have risen at the expense of smaller domestic businesses, according to Viral Acharya, who served as the Reserve Bank of India’s deputy governor from 2017 to 2019. At the same time, these conglomerates have been protected from international companies’ competition by the government’s “sky-high tariffs.”
The focus that central banks are placing on businesses that have raised prices while citing rising inflation as justification for doing so is reflected in Acharya’s remarks.
Acharya, an economics professor at New York University Stern School, stated that developing national champions, which is widely seen as the industrial policy of the “new India,” “appears to be flowing directly into keeping prices at a high level.”
He advised breaking up these companies to boost competition and lessen their ability to set prices. In a presentation to be given at a Brookings Institute conference on developing markets, Acharya suggested that if that doesn’t work, “put sand in the wheels by making it economically undesirable to stay a large conglomerate unless productivity gains are actually enormous.”
India’s issue in the past was thought to be the exact opposite—companies there were too tiny to match the productivity improvements of large corporations.
Acharya said, among other things, that because the Big 5 corporations control the manufacturing of metals, coke, refined petroleum products, as well as retail trade and telecommunications, Indian consumers could not fully benefit from falls in input prices.
He claimed that while global commodities inflation fell last year as supply-chain problems subsided, it remained high in India.
It’s not just Acharya who says this. Andrew Bailey, governor of the Bank of England, warned last week that by keeping prices raised, businesses ran the risk of causing inflation. According to Isabel Schnabel, a member of the executive board of the European Central Bank, “some of the rising inflationary pressure may indeed be related to growing market strength of corporations,” according to an article published by the Financial Times on Thursday.
The high cost of borrowing is due to India’s high core inflation, which removes volatile food and fuel prices from the headline number. Even though the RBI’s duty is to manage consumer price inflation, core inflation has entered policy discussions. For 17 consecutive months, the indicator has been above 6%.
Even after raising rates by 250 basis points since May, RBI governor Shaktikanta Das said he was keeping a close eye on inflation because of a consistently high core index. According to economists, the central bank will increase the policy rate once again the following week.
India must regain macroeconomic balance, according to Acharya, who in the past had voted against Das on important policy rate decisions.
Given India’s disproportionate fiscal and cyclically sensitive current account deficits, he warned that the increasing concentration of corporate power could make inflation much more enduring and create a vulnerability on the front of the external sector.
For the fiscal year that ends in March, economists predict that India’s current account deficit will be under 3% of GDP and that its budget deficit would be around 6.4% of GDP.
Before quitting in June 2019, six months before his tenure was up, Acharya was known as one of the RBI’s most vocal central bankers. He had been a steadfast supporter of the central bank’s independence, which culminated in a tough speech in 2018 that exposed the conflict at the time between the government and those who set interest rates.
In his paper, he stated, “I do not have all the solutions, but an open conversation about facts, possibilities, and threats, to assist India be a significant beneficiary in the China+1 shift of the global economy, would be valuable to all.” For India and the world, a lot is on the line. If India can get it right in the upcoming ten years, that would be fantastic.