Thoughts on Social Capital and Affirmative Action for OBCs

A friend of mine recently blocked me from facebook.  His anger was probably directed towards my position on affirmative action.  I had argued that socially and economically disadvantaged sections of the society need a helping hand in the form of Affirmative action.    

A particular statement perhaps angered him beyond redemption.  I had said “the simple fact that one is born as an upper caste or a forward caste (with or without economic support) vests him with phenomenal levels of privilege in comparison to other lower castes”.  This statement apparently didn’t go well with my friend as he looked at affirmative action merely through the lens of poverty and destitution and not necessarily social progress or social backwardness.   Weeks passed by and I forgot about my statement.  Privilege is a Blinding force that is difficult to grasp.  I thought.

Two days back a Muslim relative came to meet me.  He is a well to do leather businessman from UP having his clients in Chennai.  He supplies leather to them to make his money.  In fact given his annual turnover, he can even be considered ‘rich’ by Indian urban standards though they both lacked the pretentious glamour which rich normally carry (expensive cell phones, gadgets etc)

However for all their education, both him and his wife are far from educated.   They have perhaps not seen the inside of a school or a college and know close to nothing in that regard.  Their reason to see me was to ask a humble question.  The question was simple “What is this MBA?”.   I was flabbergasted at the question.  It is difficult normally to answer questions as simple as this. 

This question was important to them because their son had now passed 10^th standard (with 50 percent) and wanted to choose “a group” in school to later join a “College”.   The utter complexity the situation presented and difficulty of the choice between group 1, 2 and 3 had become an existential question to them.  No wonder they travelled 40 kms to come to the other end of Chennai to “see an expert in education” to get things clarified (that’s me btw).

But “How did you hear of the MBA?” I asked.  Their source of Gordian knot was now revealed.   A relative of theirs was doing something called MBA-CAT-IIM in Delhi (ok that dude was attending Time coaching in Delhi for CAT and they thought he was in IIM doing his MBA.  Incidentally that dude’s parents in UP also thought the same as no one knows the distinction between MBA-IIM-TIME).  And they now wanted their son to join Time to do an MBA!!!

Understanding Social Backwardness of Indian Muslim

If you thought that my story was fictitious, I assure you that it is not.  I wish it were though.

And if you thought this particular family was not really a representative of Indian Muslims at large, perhaps you are right.   This family was economically upper-class but socially backward.   But an ordinary Muslim is both economically and socially backward.  

Now can one really compare muslim kids like these who take up IIT and IIM exams along with upper-caste who have a huge eco-system around them that builds, motivates and grooms them to tackle India’s most difficult exams (parents, uncles, aunts, coaching centres and constant competitions from cousins and discussions on cutoffs).  Ask a +1 upper caste boy and he will tell you the cut off of IIT delhi and IIT kharagpur in a blink and will tell you the best coaching centres.  Ask a Muslim student, unless one has chosen a good sample, there is a real chance that one would get an answer like “what is IIT?” or “what is IIM?”. 

Yes that is entirely possible.  The social backwardness of Indian Muslim is phenomenal.   Their level of knowledge is at abysmal level which keeps them further socially backward.  They are caught in a perpetual cycle of social backwardness.   The fact of the matter is that most Muslims of India lack social capital that is necessary to get ahead socially in the society.   

So what is this social capital we are talking about? Social capital is when your parents know well about educations and the competitions outside and wake you up to study at 5am in the morning.  Social capital is when your cousins compete with you in IIT entrance.  Social capital is when a passing uncle would give tips on how to tackle India’s toughest exams.   Social Capital is when there is someone to guide you to a scholarship scheme that could benefit your education.   Social capital is when there is abundance of information at your fingertips and you are constantly being disciplined and bettered by forces of change.  Social capital is all that force that pushes a person to move towards a pre-determined goal in an organized and informed manner.    One does not see such things in a Muslim family.  Why? To start with most families themselves know little or nothing about the entire picture.

Why? Because most Muslims aren’t educated themselves.   The Evidence for this comes from the sachar committee Report which had incidentally placed Indian Muslims below the SC/ST levels and recommended for equal reservations).  Later the Justice Ranganath Mishra Commission further emphasized the deplorable condition of Muslims on socio-economic indicators and strengthened the findings, arguments and recommendations of the Sachar Committee report. 

Even a new study by an American think-tank, the US-India Policy Institute, assessing progress since the Sachar report, bluntly concludes that Muslims have “not shown any measurable improvement”. Even in education, Muslims’ gains are typically more modest than other groups’.

Consider for example, the Indian Policy on reservation states that Indian Muslims come under OBC (other backward class) category.  While there is a reservation of 27 percent, being in the creamy layer would automatically disqualify them automatically from all reservation benefits.  The Argument is that why should the state support reservation for people who are well off or who have money? 

But the policy fails to take into consideration that social backwardness is also a malaise that must be changed by the system.   The Fact of the Matter is that social backwardness is much more difficult to cure than economic backwardness.   The former can be easily cured with change in financial position which is not very difficult.  The later requires holistic change in the entire ecosystem of the society, the family that is more often than not backward looking.   While it may take merely a few years for financial position to change, the social change would require decades and even more.

If reservation policy can be used as a agent of social change, perhaps it should be.  Consider for example the education levels of Indian Muslim women.  Consider for example Kerala whose states have high level of social progressiveness compared to other states in social indices.  Even the Muslim community in Mallapuram and other places is better off than other Muslims in India as far as the economic conditions are concerned.  However socially te same is not true.  Muslim women in Kerala are married as early as 18 years without any formal college education.   There is a pressure on the Kerala Muslim families to ensure the girl is married after she has attained her age.  One can find countless profiles in shaadi.com with women as young as 18 and all from kerala (incidentally the website does not allow younger profiles than 18 years)

Now my question is why not use the tools of reservation to cure social malaise and bring social change in the society? Would not a kerala muslim family consider sending their daughter to IIM if she had gained a seat there by reservation (though she would have otherwise disqualified under creamy layer criteria).  Perhaps or perhaps not.

The underlying point is that the reason for social backwardness is again social backwardness and the result is also social backwardness.  This vicious cycle must some where be broken.  If that means that one needs to expand the confines of reservation policy beyond the “narrow crevice” of economic criteria, so be it. 

That will bring a lasting social change.

This is true not only about muslims but also about OBCs.  Social change can be brought in by strengthening the reservation system and helping to create an eco system which in turn will make the communities socially progressive.

The Indian Concrete League

The Cement Manufacturers Association of India aka the Indian Concrete League wields enormous power in our real estate economy aka infra sector.  The members of this organization comprising of top cement manufacturing companies for all practical reasons, virtually controls the entire infrastructure sector of our country by controlling production and pricing of cement.  A few of its members, sitting at a table inside their posh, well-lit office can stall any large development project whether public or private, increase manifolds the cost of construction of bridges, dams, residential and commercial complex and other projects of national importance throughout the country with a few strokes of pen.  They almost have powers to bring to a screeching halt the infra-structure engine of our nation.  The recent order of the Competition Commission levying a penalty on these companies for cartelization is a wake-up call.  The author wonders what happens to National Interest when a few people wield such enormous powers on a key input material like cement which virtually has no known substitute.  What happens when such parallel pricing and parallel production arrangements of the cartels sends waves of inflation into our economy which affects a nation of 1.2 billion people.

The Indian Concrete League

By now it is an open secret that Cement companies in India today work like ‘one body and one mind’.  As per documents obtained from Competition Commission, it is clear that the companies fix prices in advance with impunity, decide each other’s production capacities with meticulous ease.  They even monitor production and distribution of cement in each other’s plant by deploying personnel there.  And they even bifurcate sales territories amongst themselves to ensure maximum profitability is achieved and any form of competition is eliminated at bud. 

While the Cement manufacturing companies vociferously claim that they are fiercely competitive with one another, the competition commission in recent order finds the opposite to be true.  The Commission notes “The act and conduct of the cement companies establish that they are a cartel. the Commission holds that the cement companies acting as a cartel have limited, controlled and also attempted to control the production and price of cement in the market in lndia (para 178 of CCI order)”

Understanding Oligopolistic nature of Cement Industry:

Why Cartelization of Cement Industry happens is not a rocket science.  The inherent nature of cement industry is to blame for this.  To start with cement has virtually no known substitute so threat of substitute is low and the bargaining power of customers is weak making its demand relatively inelastic.  The inter-firm rivalry is weak as there are only a few players.  And the entry barrier is high due to cement industry being a capital intensive industry.  The bargaining power of supplier is also moderate as inputs like coal are plentifully available locally from India and Indonesia. 

While India has the capacity to become the world's third largest construction market by 2025 and a US$ 1 trillion market, according to a study by Global Construction Perspectives and Oxford Economics, the Cement Industry is still characterised by an oligopolistic setup.  Even as India's cement industry has become the second largest producer and exporter in the world, the problem of cartelization looms large in myriad ways. 

Consider for example that twelve cement companies have about 75-80% of the total production capacity in India with about 21 companies controlling about 90-95% market share in terms of capacity.  What is more interesting is that these companies have varying levels of shareholdings in each other making inter-firm rivalry a theory rather than practice.

Given the oligopolistic nature of the market, each company takes into account the likely reactions of other companies while making decisions particularly regarding prices.  In such a scenario, collusion between companies is possible and can be easily made out from circumstantial evidence.

The Tell Tale Signature of a Cartel

A Cartel can never be detected from direct evidence but can easily be found out from overwhelming circumstantial evidence.  Given below are the tell-tale signature of a cartel

Price Parallelism:

The Economic analysis of price data indicated that there was a very strong positive correlation in the prices of all companies.  Simply put the cement companies were increasing prices simultaneously in a scripted fashion.

Limiting and controlling production:
The documents obtained from the Commission shows that while the capacity utilisation increased, the production has not increased commensurately during this period and plant wise capacity utilisation across the board had decreased.  Simply put the cement companies were controlling production in spite of having an increased production capacity.

Limiting and controlling supply:
The Commission found that the cement companies indulged in controlling and limiting the supply of cement in the market in an organized fashion.

Production Parallelism:
According to the commission, the cement companies reduced production collectively, although during the same period the production of the cement companies differed.  This was the clearest indication of co-ordinated and organized behaviour.

Dispatch Parallelism:
The Commission also observed that the dispatches made by the cement companies have been identical. Such identical despatch can only be a result of co-ordination and collusion.

Increase in price:
The Cement companies created a deliberate shortage in production and supplies.  Since the nature of Cement demand is relatively inelastic in nature this resulted automatically in higher prices for cement.
The Commission noted that it would be impossible to justify the lower capacity utilisation especially in a market which has high demand.  Therefore the behaviour was a co-ordinated attempt at raising prices by cutting production.

Price Leadership:
The commission noted that due to oligopolistic nature of the market and a few major cement manufacturers, the price leaders discussed with the other manufactures to co-ordinate their strategies to increase prices.

Commission levies a Penalty of Rs 6300 croresThe Competition Commission of India (CCI) had cracked the whip on these companies and imposed a whopping penalty of Rs 6,307 crores on 11 leading cement firms for forming a cartel and for the act of collusion to charge higher prices to consumers.  The Competition commission after investigating a complaint from Builders Association of India in no uncertain terms had noted that the companies were engaged in a collusive behaviour with parallel pricing and parallel cutting of production to raise prices.

Role of Cement Manufacturers Association (‘CMA’)

Further the commission also notes that the Cement Manufacturers Association, an association which was purportedly setup to promote the interests of cement industry as a whole facilitates these activities by providing the much needed production and sales data’s to each other.  The Commission noted that the CMA publishes statistics on production and dispatch of each company (factory wise) and circulates such information amongst its members. The sharing of price, production and dispatch data makes co-ordination easier amongst the cement companies.  This ensures that such unscrupulous activities (like price fixation) take place in a more informed manner. 

The Commission also noted that cement prices increased sharply after the High Powered Committee Meetings of the CMA which were attended by the cement companies.  What transpired in these meetings is not a difficult guess.

To sum up what comes out of the courts document is that CMA acts like a ‘Big Boys Club’ and helps to ensure that anti-competitive activities take place in a more organized, informed and meticulous manner.

Cartelization affects National Interest and Infra Sector Growth

The Author argues that the effects of Cartelization of Cement Industry seriously impacts national interest and also negatively impacts the infra sector growth.  For example, the Cement Manufacturers Association of India aka the Indian Concrete League wields enormous power in our real estate economy.  This organization comprising of cement manufacturing companies for all practical reasons, virtually controls the entire infrastructure sector of our country.  A few of its members by few strokes of pen (by cutting production of cement and increasing prices), sitting at a table inside their posh, well-lit office can stall any large development project whether public or private, increase manifolds the cost of bridges, dams, residential and commercial complex throughout the country.  They have powers to bring to a screeching halt the infra-structure engine of our nation by parallel pricing, parallel cutting down of production or even choking supplies.

What happens when such parallel pricing and parallel production arrangements of the cartel send waves of inflation into our economy which affects a nation of 1.2 billion people is also a well-known phenomenon.  What happens to National Interest when a few people wield such enormous and absolute powers on a key input material like cement which virtually has no known substitute is left to the imagination of the readers? 

What is at stake in this whole issue is also economic development of this nation.  Cartels like these seriously impact economic development.  The Commission correctly noted that national interest affected in its order “The act of the parties in limiting and controlling supplies in the market and determining prices through an anti-competitive agreement is not only detrimental to the cause of the consumers but also to the whole economy since cement is a crucial input in construction and infrastructure industry vital for economic development of the country (para 180)”

Containing the Djinns of Concrete

So how does one contain these Djinns of Concrete? How does one ensure that the interest of all stake holders are well managed?  Firstly the author believes that the the Ayn-Randian view of free market economics is flawed in this context especially in an oligopolistic setup and when one talks of key input industries like Cement.  In context of cement industry of India, the Ayn-Randian view of free market economics simply ignores the fact that a few men sitting at a table at their whims and fancies can, for all practical reasons, halt key projects of national importance and send waves of inflation into a nation of more than a billion people.  Therefore more regulations and active monitoring by the state is a necessity for healthy growth of the Industry.  The fact of the matter is that liberalisation has done away with many of the instruments that the government has at its command to deal with cartels of the kind that we see in cement industry today.  Economic Reforms without regulations not only engenders creation of monopolies and oligopolies but also provides incentives to oligopolistic firms to exercise their market power in a manner that promotes only their own interest.

Secondly, a multi-faceted approach is necessary to contain these Djinns of Concrete.  We must not only strengthen our deterrent regulations to impose higher penalties for such unscrupulous acts of price fixing but also actively work to reduce incentives which motivate companies to adopt such practices and increase real competition.  In short we must make capitalism work and work for all.

Concluding thoughts - Making capitalism work

A hundred years of empirical evidence in economic history of the world indicates that capitalism does works for all but only when it is made to work for benefit of all.  In other words Adam Smith’s invisible hand can do wonders and bring economic prosperity as long as it is safe guarded from those who seek to fracture the hand to gain undue benefits for themselves.

Therefore while Competition Commission has done a laudable job of imposing penalties for cartelization, the Author hastens to point out that the work doesn’t end there.  The Government of India has a greater responsibility.   It has to ensure that the interests of entrepreneurs, the general public and the state is adequately balanced and well protected.  It has to ensure that ‘Cement’ a key input which has absolutely no substitute today is always available as at reasonable prices to all those who need it.  The way to do it is not by going back to the Licence Raj or by fixing prices of cement by an executive fiat. 

The way to do it is by making capitalism work.  The way to do that is by increasing competition in the sector which will unleash competitive spirit leading to innovation and growth of the industry as a whole. 

1. The author recommends providing economic and fiscal incentives and special stimulus to new entrepreneurs to start new cement factories and increase production capacities.

2. The author also recommends setting up a fully Independent Cement Regulator which is both functionally and financially autonomous of the state and is comprised of experts from the Industry who will balance the interests of all stake holders concerned and regulate the industry for benefit of all.

3. The Author recommends that the state must help to bring down the entry barrier by providing new cement companies with low duty import of capital goods and providing easy finance to increase their production capacities to compete with bigger and global players. 

4. Finally the Author also recommends that the state must also start more of its own fully autonomous cement factories and compete shoulder to shoulder with private entrepreneurs in equal measure.  It is the withdrawal of the state in the wake of deregulation that helped those oligopolies to be created and nurtured.  A free market does not automatically mean that the state is reduced to a role of a tax eating rentier class but can also contribute in equal steps and in equal measure to the growth engine of the nation while simultaneously managing public interest.