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Raghuvir Srinivasan

THE proposed merger of Reliance Petroleum with Reliance Industries is likely to ignite afresh the controversy over whether the latter should be permitted to bid for the privatisation of Indian Petrochemicals Corporation Ltd (IPCL). The Government had seemingly put the lid on the issue last week when it rejected the plaint of Indian Oil Corporation (IOC) that Reliance Industries should be disqualified from the race for IPCL. IOC was earlier disqualified from the privatisation process of Bharat Petroleum and Hindustan Petroleum on the grounds that a monopoly would be created if it were to acquire one of the two companies. Using that as the precedent, IOC argued that Reliance should be disqualified from the bidding process for IPCL as it could lead to a monopoly in the domestic petrochemicals industry if the bid were to prove successful. To be sure, IOC is an interested party, being one of the bidders for the government stake in IPCL, and it could well have raised the issue just to queer the pitch. Yet, there appears to be some justification in the monopoly argument.

This is not the first time that a question has arisen over whether Reliance should be permitted to bid for IPCL. The Disinvestment Commission, in its earlier incarnation under the chairmanship of Mr G. V. Ramakrishna, had said that the IPCL privatisation should be handled in a manner that would not create a monopoly in the domestic market. However, the Government overlooked the recommendation in its previous attempt at privatising IPCL.

There is no doubt whatsoever that acquisition of IPCL by Reliance would create a dominant player in the domestic market. They are after all the top two companies in the petrochemicals industry in India. The combined entity would account for more than 70 per cent of the total market in the country for major polymers and fibre intermediates. It would account for two-thirds of ethylene cracking capacity and become the dominant player with a strangle hold on the market for products such as polypropylene and poly vinyl chloride. More important, the combined marketing network of the two players, each of which is quite strong independently, will prove unbeatable in the market by any of the other smaller players such as Haldia Petrochemicals and Gas Authority of India. It is anybody's guess whether such a mammoth marketing machine will be a benign one in the market place, especially where the other two players are small.

In the face of such facts, what is the basis for the Government argument that no monopoly would be created? First, it says that petrochemical products are on Open General Licence (OGL), which means they can be freely imported. The implication is that the industry competes on the world stage and is not restricted to the domestic market. In a falling import duty regime, it would be impossible for any one player to dominate the domestic market, says the Government. While theoretically, this may be right, practically, the argument appears flawed. Against a projected 31 lakh tonnes of demand for polymers this year, total imports are expected to be around 2 lakh tonnes, which is just about 6 per cent. That is the extent of competition that would emanate from offshore.

To be sure, this percentage will not increase dramatically in the near future for various reasons. With an excess capacity of about 20 per cent already in the domestic petrochemicals industry, no way imports are going to increase. Even the small quantity of imports that are coming in now are of special grades of polymers that are not produced in India. Besides, the Indian market is yet to mature in terms of having large merchant importers of commodity products who would later resell them in the retail market. Unless that happens in a big way, imports cannot really be a big competitive threat. So what protection are we talking about for domestic consumers from monopolies?

Second, the Government says that it is not mere monopoly but its abuse that should be a cause for concern. The implication is that monopolies can be tolerated so long as they do not abuse their power. History, within India and abroad, would show that there has rarely, if ever, been a benign monopoly. Monopolies are by their very nature dominant and it would be naïve to expect them to be benign and not abuse their power. In any case, the question of what constitutes abuse of power can itself become a subject of controversy later. An important point to note here is that the country still does not have effective laws to deal with monopoly issues. The Competition Bill is still pending in Parliament and the Competition Commission is yet to be constituted. It would be dangerous in this situation for the Government to consciously aid the creation of a monopoly player.

The Government's final argument is rather flippant. It says that since Binani Industries, the only player in the zinc industry, has been permitted to bid for Hindustan Zinc, there exists a precedent. But it is an unhealthy precedent. For whatever reason it was done, the fact is that the Government will be aiding the creation of a monopoly in the zinc industry by handing over Hindustan Zinc to Binani Industries. There is no justification why a wrong precedent should be followed now. Besides, the divergence in government policy between the IOC-BPCL/HPCL case and this is rather marked.

There is no doubt that the Government has done the right thing in disallowing IOC from the race for BPCL and HPCL as that would lead to a monopoly in the oil industry. It is surprising that the same logic is not being applied in the Reliance-IPCL case as well. The combined entity of Reliance Petroleum, Reliance Industries and IPCL would be a giant in the domestic energy sector, in general, and petrochemicals, in particular. The news of the merger is bound to raise fresh questions on the correctness or otherwise of the Government's decision to permit Reliance to bid for IPCL. The coming days in the run-up to IPCL's privatisation should be interesting.

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