Introduction
India Inc. is witnessing an unprecedented profit surge, with corporate balance sheets looking healthier than ever before. While various macroeconomic and sector-specific factors contribute to this phenomenon, one metric has quietly gained attention among economists and analysts: the Herfindahl-Hirschman Index (HHI), or simply, the Herfindahl Index.
Originally devised as a tool to measure market concentration, the Herfindahl Index is now helping decode the growing dominance of a few large firms across several Indian industries. This article explores how increased market concentration, as reflected by rising HHI scores, is linked to the recent profit boom in India Inc., the implications for competition, and the road ahead for regulators and businesses alike.
Understanding the Herfindahl Index
The Herfindahl Index is a statistical measure used to determine the level of competition within an industry. It is calculated by squaring the market share of each firm in the industry and then summing the resulting numbers.(https://en.wikipedia.org/wiki/India_Inc.)
Formula:
HHI = s₁² + s₂² + s₃² + … + sₙ²,
where s = market share of each firm (in percentage terms).
Interpretation:
- HHI < 1500: Competitive market
- 1500 ≤ HHI ≤ 2500: Moderately concentrated
- HHI > 2500: Highly concentrated or monopolistic
Higher values of HHI indicate greater concentration and less competition, often resulting in market power consolidation by dominant firms.
Profit Boom in India Inc.
Over the past few years, India’s leading companies have posted record-breaking profits. According to CMIE (Centre for Monitoring Indian Economy) data:
- The net profit to GDP ratio touched a 15-year high of 5% in FY2024.
- India Inc.’s aggregate profit reached ₹12 lakh crore, nearly double compared to FY2019 levels.
- Just 20 companies accounted for over 70% of total corporate profits in the country.
While macroeconomic recovery, favorable commodity prices, and efficient cost structures are part of the story, the disproportionate share of profits among fewer firms points to increasing market concentration—a key indicator measured by the Herfindahl Index.
How the Herfindahl Index Explains the Profit Surge
1. Market Consolidation
Several industries have undergone major consolidation in the past decade, driven by mergers, acquisitions, and the exit of weaker players—especially post-pandemic. The Herfindahl Index has steadily risen in sectors like:
- Telecom (e.g., Vodafone Idea’s decline, Jio-Bharti dominance)
- Cement (e.g., UltraTech, Adani Cement consolidating market share)
- Aviation (e.g., IndiGo’s market lead post Jet Airways collapse)
As competition reduces, the remaining firms enjoy pricing power, economies of scale, and higher margins, directly boosting profits.
2. Survival of the Fittest
The economic shocks of demonetization, GST rollout, and COVID-19 created a survival-of-the-fittest scenario. Informal and smaller firms, unable to absorb costs or comply with regulatory changes, exited the market. The surviving formal players—usually larger, well-capitalized firms—gained more market share and subsequently higher profitability.
This shakeout increased industry concentration, pushing HHI scores upward and allowing dominant firms to operate in less competitive environments.
3. Regulatory Arbitrage and Barriers to Entry
Sectors like digital platforms, e-commerce, and fintech have evolved under light-touch regulation, enabling first movers to scale rapidly without strong checks. Meanwhile, new entrants face steep compliance costs, data localization mandates, or capital requirements.
This dynamic strengthens incumbents’ position, raises the Herfindahl Index, and leads to higher long-term profitability.
Sector-Wise Herfindahl Index Trends in India
Let’s examine how rising concentration (via HHI) has impacted profits in key sectors:
1. Telecom Sector
- HHI Score: ~3200 (highly concentrated)
- Dominated by Reliance Jio and Bharti Airtel
- After Vodafone Idea’s erosion, competition weakened.
- Result: Average revenue per user (ARPU) rose, boosting profits.
2. Banking
- HHI Score: ~2200 (moderately concentrated but rising)
- Top private banks (HDFC, ICICI, Axis) and SBI dominate the landscape.
- Smaller NBFCs and cooperative banks have shrunk post NBFC crisis and stricter RBI norms.
- Larger banks enjoy low cost of capital and high return on equity (ROE).
3. Cement
- HHI Score: >2500 in several regions
- Top 5 players account for more than 70% market share.
- Regional duopolies and cartel-like behavior suspected.
- High pricing power leads to robust EBITDA margins.
4. FMCG
- Relatively diversified but HHI trending upward due to consolidation (HUL-GSK merger, etc.)
- Top brands dominate rural and urban markets.
- Benefit from deep distribution networks and brand loyalty.
Advantages of High HHI for Corporates
1. Stable Pricing Power
With fewer competitors, dominant firms can avoid price wars and maintain healthy margins.
2. Lower Customer Acquisition Cost
Reduced need for aggressive marketing and discounting translates into higher operating profit.
3. Efficient Capital Allocation
Market leaders can deploy capital in R&D, automation, and global expansion, strengthening the profit flywheel.
4. Investor Confidence
High concentration and profitability boost stock performance and attract institutional capital.
Risks and Concerns: The Flip Side of High HHI
While rising HHI and profit booms appear to be a corporate success story, there are notable downsides:
1. Reduced Competition
High HHI indicates monopolistic or oligopolistic structures, leading to poor service quality, stagnant innovation, and higher prices for consumers.
2. Jobless Growth
Dominant firms often rely on automation and lean operations. While profits rise, employment generation stagnates, leading to K-shaped growth.
3. Regulatory Scrutiny
Rising concentration may invite antitrust investigations and price regulation, as seen in the US and EU (e.g., scrutiny of Google, Amazon, Apple).
India’s Competition Commission is also waking up to these trends—reviewing mergers and probing anti-competitive practices.
4. Weakened MSME Sector
If large firms crowd out MSMEs due to scale and pricing power, the overall economic diversity and resilience of the economy may suffer.
Government & Regulatory Response
Competition Commission of India (CCI)
- Launched studies on digital economy, pharma, and e-commerce to monitor market concentration.
- Proposed ex-ante regulation for Big Tech to preempt abuse of dominance.
Ministry of Corporate Affairs
- Advocating for ease of doing business to help smaller firms survive.
- Push for Open Network for Digital Commerce (ONDC) aims to democratize e-commerce.
RBI & SEBI
- Focus on level playing field for fintechs vs. banks.
- Monitoring capital markets to curb excessive promoter control and insider trading.
Global Comparisons: Lessons from Abroad
United States
- Big Tech firms have HHI scores similar to or higher than India’s telecom or e-commerce sectors.
- Rising inequality and monopoly profits led to bipartisan antitrust efforts.
European Union
- Stricter enforcement through Digital Markets Act (DMA) and Digital Services Act (DSA).
- Google fined billions for abusing search dominance.
India may need to adopt similar frameworks as concentration continues to rise across sectors.
The Road Ahead
1. Balancing Growth with Fair Play
India must strike a balance between rewarding efficient businesses and preventing monopolies. Encouraging inclusive growth, supporting MSMEs, and fostering innovation are key.
2. Strengthening Antitrust Infrastructure
The CCI needs more resources, tech expertise, and a proactive approach in monitoring evolving digital and traditional sectors.
3. Periodic HHI Monitoring
Policy think tanks and government agencies should regularly publish sector-wise HHI reports, enabling transparent market evaluation.
4. Empowering Consumers
Allowing consumers to switch providers easily, promoting interoperability, and ensuring access to alternatives will reduce the ill effects of high HHI.
Conclusion
India Inc.’s ongoing profit boom is not merely a function of economic recovery or global tailwinds—it is deeply intertwined with rising market concentration, as captured by the Herfindahl Index. While dominant firms have reaped significant benefits in a post-pandemic economy, the concentration of power also poses risks for innovation, employment, and consumer welfare.
Going forward, India must recognize the double-edged nature of high HHI scores. Regulatory vigilance, inclusive policymaking, and fostering competition will be essential to ensure that the profit surge benefits the broader economy and not just a handful of conglomerates.
