Former RBI dy governor says pricing power of ‘Big 5’ driving core inflation

A sharp rise in industrial concentration led by five major private sector firms has allowed these companies to charge much higher product prices than competitors, in turn possibly leading to persistent core inflation, former Reserve Bank of India Deputy Governor Viral Acharya said on Monday.

“The Big 5 are able to charge product prices that are substantially higher than other competitors in the market. In contrast this is not true, on an average, of the top 5 (in various sectors). The implication is basically that the top 5, which are not (always) the Big 5, are not actually charging mark-ups that are systematically higher than others,” Acharya said at the NSE-NYU conference on Indian Financial Markets.

The ‘Big 5’ Acharya referred to were the Reliance Group, the Tatas, Aditya Birla Group, Adani Group and Bharti Telecom.

“…what we are finding is that perhaps this is a component that’s actually driving some of the core inflation. We find that when input prices rise, if market power in an industry is high, the wholesale price inflation in that sector actually rises a lot more and then of course that eventually will feed into the CPI,” he said via videoconference.

Inflation in India has been elevated for the past few years, with the Covid crisis and the Ukraine war severely affecting global supply chains. Latest data showed CPI inflation was at 6.4 per cent in February, much above the RBI’s target of 4 per cent and outside its tolerance band of 2-6 per cent. Core inflation, which strips out the volatile components of food and fuel, remained above six per cent.

Acharya noted that while it could be argued that the sector was just becoming concentrated with large firms becoming larger at the expense of smaller firms, this was not the case. “The Big 5 are growing at the expense of the big 6 to 10. Just to give you a very concrete number here, from 1991 to now, the Big 5 business groups’ share of total assets rose from 10 per cent to 18 per cent. The Big 6 to 10 are the ones who have ceded space to them,” Acharya said.

“This is about concentration at the very top in a sector rather than simply doing it for small firms to large firms. This is about making the industrial organisation very, very heavily concentrated at the Big 5. They now control around 18 per cent of the non-financial sector assets and about 12 per cent of the sales,” he said.

According to Acharya, even though it had not been explicitly stated, it was very clear that at the current juncture there exists an industrial policy of creating “national champions” out of the large conglomerates. The expectation, presumably, was that by doing so, these companies would become the ‘Samsungs” of the world. “…when it’s the same Big 5 companies that are becoming larger and larger in every sector of the economy, then it raises several difficult questions. You are creating national champions, they might be seen as too big to fail in credit allocations by banks and bond markets; they might be becoming so large that it becomes very hard to understand their related party transactions,” he said. “They become very opaque, complex, many of these as we know are run by family firms. You then have key men or key women or key family risks because ownership in India is very very concentrated,” he said.

In response to a question from former RBI Governor D Subbarao as to whether his paper was driven by a degree of prescience about the Adani-Hindenburg episode, Acharya said that he had started research on the topic of industrial concentration before the events occurred.

“The real deeper reason why I got interested in this was because of my stint at the Reserve Bank of India. I got to understand Indian inflation and its data at a much more micro level,” he said. “I’m finding that the core inflation in India has become too persistent, it’s just not budging from 6 per cent. Inflation expectations have risen which is usually a corollary to core inflation staying high for a while, because then it starts entering wages,” he said.