Despite the Competition commission’s indictment last year for cartelization and imposition of penalties, In the last two years, the price per bag of cement continues to shoot up. The prices have gone up from around Rs 250 to Rs 380- Rs400 per bag. This contributes substantially to inflation in the construction industry.
The Story So Far – Cartelization in Cement Industry
Last year the competition commission imposed a penalty of over Rs 6000 crores on the major cement companies. In its investigation it found that these companies fix prices in advance and decide each other’s production capacities after mutual discussions. The Companies also monitor production and distribution of cement in each other’s plant by deploying personnel there. If that was not enough they also bifurcate sales territories amongst themselves to ensure maximum profitability is attained and any form of competition is eliminated in bud. These are facts recorded in the order of Competition Commission of India based on which a hefty fine was imposed by the commission. The Commission also found that twelve cement companies have about 80% of the total production capacity in India. These companies also have varying levels of shareholdings in each other making inter-firm competition a myth. In fact the world’s leading cement companies Holcim of Switzerland and Lafarge of France are merging to gather to form a single entity which is also said to have an adverse effect on competition in India. However, despite the hefty penalties and legal wrangle with the fair trade regulator, little has changed on the ground and prices of cement continue to rise.
Cement has no known substitute so far
It is well known that Cement is a key input material in the Construction Industry which has virtually has no known substitute on date. Various innovative researches into alternative input materials have not yielded any results. Research and Technological solutions though promising have not shown any results on being able to replace cement so far. Therefore the only solution as on date is to regulate the cement industry for the healthy growth of Construction industry and Infrastructure in India. If the state fails in this enterprise then inflation in construction industry is imminent.
Monitoring the cement prices and preventing cartelization is essential
1.The First step in Regulating the Cement Industry is to setup an Independent body of expert called the Cement regulator who monitors the prices of cement on a continuous basis. Even a recent report by parliamentary standing committee has recommended that an Independent Regulator is needed to control the cartelization of cement industries in India.
2.The Regulator must have powers to fix ceiling limit of prices for cement after collating costing data and analyzing the numbers. The Regulator should also allow for a generous return of capital for the cement companies so that profitability of the industry is maintained. Fixing prices would act like upper circuit breaker beyond which companies cannot sell their cement bags. Contrary to the apprehension of free marketers, such price controls already exists in small goods in the form of Maximum retail price under the MRP Act.
3.The Regulator must have power to call information from companies regarding production, pricing, dispatch and marketing of Cement. The Regulator must intervene if he notices a sudden drop in the production level or notices a parallel pricing arrangement or parallel dispatch arrangement in the cement industry.
4.The Cement Regulator must issue from time to time a number of regulations, orders and directives to deal with various issues in the Cement Industry like quality of cement, safety and other issues dealing with governance. The Regulator can also provide the required direction and vision for the evolution of the Indian Cement market to a more open and competitive market.
5.For grievances that the cement companies may have against the orders, directives and decisions of the Cement Regulator, an appellate authority can be setup which may be called Cement Settlement Appellate Tribunal (CSAT) where the aggrieved party can contest the claim of the Regulator.
6.The CSAT can pass orders either in favor of the cement companies or on the side of the Regulator based on the merits of the each casse. Basically, the CSAT will take over the adjudicatory and disputes resolution functions of the lower courts thereby reducing the burden on the lower courts in the country. This will provide efficient and quick dispute resolution mechanism for grievances of the Cement companies may have against the cement regulator.
Concluding thoughts
For healthy growth of Construction Industry in India, it is necessary that the state must make efforts to Regulate, control and monitor the prices of Cement and provide direction to the Cement Industry. We need to move to from the Open market Regime of cement Industry to a more regulated setup which works for the benefit of all the stake holders.
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