A competition policy for growth

Economic Times, September 29, 2009

By Pradeep S Mehta

The Planning Commission will soon be conducting a mid-term review of the 11th five year plan (2007-2012). It will also take a look at the issue of a national competition policy, one of its recommendations in its policy document “Inclusive Growth” that was adopted by the National Development Council in December 2007.

The new government should revisit the same to ensure that inclusive growth is promoted and poverty reduced. Promoting competition is not only important as a principle for providing a just environment for all businesses, the fair race that it initiates among rival firms, including small producers, drives sustained growth.

It also keeps prices low by curbing collusive as well as monopoly pricing, as firms compete for consumers by minimising costs through efficient production.

India adopted the new competition law in 2002. Implemented after much delay, it replaced the vastly ineffective Monopolies and Restrictive Trade Practices Act of 1969. The older law was more of a licensing law. To curb anti-competitive practices, it had a mechanical approach: firms came under the scanner only if they acquired market dominance. And, it was the magnitude of market shares that was important, not how such market shares had been secured.

It is important to realise that a competition law by itself cannot ensure that the competitive spirit and culture permeates deep into the economy. It should be complemented by a national competition policy (NCP) to push structural and legislative reforms to promote competition in markets where it is restricted.

The competition law only focuses on the conduct of firms and ensures that such conduct is consistent with the spirit of fair play. However, distortions could arise due to either another law or policy. There are many such incongruities.

For instance, the mineral policy restrict quantitative extraction of minerals as well as sale of the minerals by the licensee. Unless there are valid social or environmental reasons, such policy conditions may go against the spirit of competition.

Use of trade policy instruments such as anti-dumping — without examining their deleterious effects on downstream industries — on the basis of complaints from domestic lobbies is another such recurring phenomenon. Some sector specific regulators would also implement laws that may vitiate the competitive spirit.

The NCP attempts to ensure congruity between all or most national and state laws with the principles of competition. That helps further the objectives of a competition law — to foster competition in all sectors of the economy and thereby induce efficiency, innovation and growth.

For a successful NCP, extensive advocacy and consultation are needed. This requires the cooperation and coordination of institutions such as the competition commission, civil society organisations, sector regulators and the government. The primary motivating factor behind the NCP is political will and priority accorded to growth as a political objective.

Ensuring competitive neutrality is another crucial aspect of the NCP — government businesses should not enjoy any undue advantage over private businesses. The requirement that government officials fly only Air India goes against this principle. Competitive neutrality is necessary to ensure competition within and across public and private enterprises.

The Planning Commission had established a working group on the NCP in 2007 to examine its various facets. This working group has already raised concerns over some policies, statutes and regulations at the levels of the central and state government that limit competition and has recommended review of such policies through the tool of competition impact assessment.

The Australian approach towards competition policy can be useful in the Indian context. There too, the competition policy followed the competition law. But, the competition policy was preceded by an extensive review of all legislation from the competition perspective, and all laws and measures that had provisions (over 2,000 in number) violating the spirit of competition were repealed or amended.

The envisaged NCP approach would ensure equitable application of competition rules to all economic agents in the economy. It works on the principle that social welfare is best served by promoting competition.

Once adopted, the central government in coordination with the state governments should ensure that NCP is implemented uniformly across the country, particularly in respect of structural reform of public monopolies, review of anti-competitive legislation and regulation and the elimination of undue advantages enjoyed by government businesses where they compete with the private sector.

The NCP is an important step forward in establishing a consistent national economic framework to promote and maintain competition in all sectors of the economy. This, however, is clearly only an initial step in initiating wide ranging reforms to generate a culture and spirit of competition in the economy.

The author is Secretary General, CUTS International and can be reached at psm@cuts.org

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