Bernie Frank along with Chris Dodd authored the famous Dodd-Frank Report, which frame regulations for the financial industry following the 2008 Global Financial Crisis. A major lesson from the GFC, which led to the Great Recession, is that lack of proper regulation in the financial sector can lead to excesses culminating in systemic problems impacting the entire economy.
When firms grow too big in an unregulated environment, and risky economic decisions are made with short-term objectives, these firms can collapse causing systemic failures. Economic decision-making by a few large players can impact the livelihood of millions of people who have nothing to do with those decisions.
Capitalism promotes competition. Competitive markets benefit all stakeholders. But capitalism needs effective regulation. In the absence of competition, monopolies emerge by exploiting consumers, destroying rivals and corrupting the system through their enormous power.
Crony capitalism can do great damage not only to an economy but also to the democratic political system. That’s why economists argue for prevention of monopolies.
This is the age of mega corporations. The market-cap of FAANGs – Facebook, Apple, Amazon, Netflix and Google (Alphabet) – is around $5 trillion. With humongous wealth and dominant market position, mega corporations might become monopolies eliminating the benefits of competition. The objective of anti-monopoly legislation is to prevent the emergence of monopolies.
The recent joint party report by the US Congress accused Google, Amazon, Facebook and Apple of monopolistic actions. Anti-monopoly legislation in the US has a great track record of breaking up potential monopolies.
As early as 1911, the US oil giant Standard Oil was broken up into 34 companies by the US Supreme Court. In 1984, telecom giant AT&T was broken up into seven regional companies. Giants like Microsoft and IBM were accused of misusing their monopoly power.
Actions like these are necessary to ensure that capitalism works for the “greatest good of the greatest number.”
Size alone poses no problem
Liberalisation enabled successful Indian companies to grow. Some of these large companies have contributed substantially to India’s economic growth and development. For instance, TCS, which has grown to become the second most valuable company in India with a market cap of around Rs 8 lakh crore, now employs more than 450,000 employees – 2 lakh more than that of SBI.
Companies like TCS have grown big in a highly competitive environment and pose no threat. There are many examples like this. So, the problem is not with size, but with dominant market position.
Monopolistic tendencies in some crucial segments
There are a few undesirable trends in some sectors where market share is becoming dominant with potential monopolistic trends. For instance, India’s telecom market is now a near-duopoly. Many telecom companies have gone bankrupt with implications beyond the industry. Large bankruptcies in the telecom industry have contributed to rising NPAs in the banking sector with its disastrous consequences.
Another undesirable development is the monopoly trend in some crucial infrastructure segments. In the 2019 airport auctions, all six airports had gone to the Adani group. This trend needs to be curbed.
Regulators have to be extra-vigilant
India continues to be a vibrant competitive economy. But the rising monopoly trends in some segments are disturbing signals. This emerging monopoly trends are the consequences of many factors. Shortsighted regulators, governments trying to squeeze maximum revenue from the industry and a judiciary interpreting the law in letter rather than looking at the issue from a holistic perspective… all have contributed to this undesirable trend.
Many telecom companies in India have gone bankrupt contributing to the rising NPAs of India’s fragile banking system. The telecom bankruptcy is largely the consequence of the cut-throat competition unleashed in the industry by RIL Jio’s price war. When Jio disrupted the telecom market with free voice calls and dirt-cheap data, rivals approached the Competition Commission of India accusing Jio of predatory pricing.
But the CCI rejected the case and gave a ruling that RIL Jio is not a dominant player. Now, Jio has a dominant market share of more than 35 per cent and is the only profitable firm in the industry. Regulators have to be farsighted to spot emerging dominant firms. The SC judgment in the AGR case has added to the woes of the industry. In effect India’s telecom industry has now become a duopoly.
Nobody can legally fault the Adani group for walking away with all the six airports in the auctions. But this trend needs to be curbed with appropriate provisions in the next round of airport auctions.
The Indian economy is likely to emerge strong post-Covid with sharp rebound in economic growth. Sustained high growth is essential for addressing the challenges that the nation face. A competitive market economy alone can deliver sustained high growth.
(The author is Chief Investment Strategist at Geojit Financial Services. Views are his own)
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