A FINE BALANCE – Development needs competition, but it must be regulated

The Telegraph, August 25, 2008

In the days of a command and control economy, economic legislation was negative. Industrial licences to start new industries were not easily given. Your imports needed import licences, you were told where you could import from, you could not choose your preferred location for your industry, there were limits to expanding capacities, ‘large’ industrial groups had many restrictions on their freedom to add new capacity or diversify, ‘monopolies’ were discouraged and what was a monopoly was narrowly defined. Companies and their managers had lived under these restrictions for so long that they could not conceive of another regime. Dealing with the government was a special science. Every company had resident representatives in Delhi. This was apart from suitcase-carrying ‘public relations’ firms who had intimate access to some bureaucrats and ministers.

One restrictive law was the Monopolies and Restrictive Trade Practices Act or the MRTP. A monopolies commission would tell you what you could not do and haul you up, for example, for producing more than your licensed capacity. After 1991, the consumer movement led the effort to place the consumer at the centre. The new approach was to encourage enterprise and competition, not look for monopoly characteristics in the law or through the monopolies commission. That was the genesis of the Competition Act of 2002, revised in 2007.

The movement to place the consumer at the heart of industrial legislation by encouraging competition was led by Pradeep Mehta. In 1983, he founded a non-governmental organization with the awkward acronym of CUTS — the Consumer Unity and Trust Society, in Jaipur. It began a rural development communication initiative which published (it still does) a wall newspaper, Gram Gadar (village revolution).

In 2008, CUTS is the leading organization perhaps in the whole world, advocating liberalization and competition, competition policies, and competition laws to check market failures, and engaging in actively pursuing competition routes to social and economic development. It has naturally extended itself into research on economic, industrial and social issues. It works on related issues of trade, regulation, governance and development. Only Teri, The Energy and Resources Institute, matches its reach. Both CUTS and Teri are involved in international and domestic issues and policies: energy and environment for Teri, and competition and consumers for CUTS. Both work all over India and in other countries. CUTS is engaged deeply in Europe, Africa and Southeast Asia with six offices and other networks. CUTS has also established other research and training institutions to deal with these and related issues in international trade, environment, investment, economic regulation and human development.

A competition culture has yet to take root in India. Policymakers and the public meekly accept anti-competitive practices. The competition commission of India, created over five years ago, has yet to start functioning. It has undertaken useful studies on the competition and the obstacles to it in many sectors of the economy.

A law and a commission are not enough to ensure competition. We need tough regulation with power to impose penalties that hurt. We need to be clear on the jurisdictions of sectoral regulators and the competition regulator. Professional management and good corporate governance create a good enabling environment for a competition culture. Placing the consumer at the centre is the main goal.

Despite the lack of an active regulatory authority, liberalization from licensing restrictions, the opening of the economy to foreign goods, services and investment, and the new technologies in information and communication, have brought significant changes to consumers’ lives. The prominent example is of telecommunications, which has seen an explosion in its reach and a continuous fall in cost, making India the cheapest for telecom tariffs in the world.

Economic reforms have brought positive and speedy results for the consumer. By itself, even if it existed, a competition commission may not have achieved them. For example, when Unilever, owners of Walls ice cream, bought up the dominant player, Kwality, many saw it as an anti-competition act. Today, 15 years later, new entrants, an essential prerequisite for competition, have increased the availability of ice-cream manifold, prices are low, the quality is better and Unilever is not the dominant player.

In contrast, many anti-competition practices remain. For example, banks collude to change interest rates by the same amount and at about the same time, sometimes at the public instance of the finance minister. In the midst of a severe diesel shortage in the country, the largest oil refiner, a private company, is exporting almost all its diesel overseas at higher prices and making huge profits. The Indian consumer does not get any benefit from having a large domestic refiner.

The same company is unable to supply gas from its rich fields leased from the government for power generation at prices that the power sector and its consumers can afford. Prices are linked to ‘international market’ prices. Government leases nationalized coal mines for power generation to ultra mega power projects, but will not follow the same practice for gas. The Maharashtra and Karnataka governments compel their consumers to buy wines produced within their states by imposing special taxes on wines coming from outside their states.

There is no regulation of overseas mergers and acquisitions by companies operating within India, enabling market dominance by the merged entity in India. In the absence of a watchdog and enforcing authority for competition, regulation is not proactive in most sectors. In healthcare delivery, almost all elements — from manufacturers and the quality of the product to the paying of medical practitioners to prescribe their products, to the fact of retailers freely supplying all types of drugs without hindrance, or that over 40 per cent of drugs are fake — are important issues. The consumer faces huge health risks.

In education, especially professional and technical education, there is similar regulatory failure. Management education has over 1,400 government-recognized schools charging high fees that students pay because of the prospect of good jobs upon graduation. Most of them have poor facilities, untrained faculty, poor libraries, and so on. The student as a consumer of management education is being ripped off. The regulator, the All India Council for Technical Education, is ineffective. There is no competition authority to protect consumer interest.

Development requires competition. But competition must be subject to overseeing by regulators. Market players look for monopoly positions to ‘own’ the consumer through fair means like advertising, distribution, quality, service and so on. They can also entrench themselves by misusing their larger size to dominate and even destroy competition.

Collusive acts through seller cartels joining to divide markets and fix prices to benefit each member of the cartel are difficult to prove. It has been alleged that industries like cement and tyres have engaged in such behaviour. Competition policy, law and a commission cannot by themselves ensure that competition benefits the consumer. Easy entry for new entrants and exit, ample information available to all, preventing cartels, the misuse of inside information and practices that intimidate competitors, are all necessary. In a country of so many poor people, we might need to allow special pricing and other seemingly anti-competitive acts. Competition must not be allowed to destroy livelihoods of millions of small and self-employed producers. How much competition a nation must have depends on its stage of development and the country’s place in the world economy.

CUTS has developed a finely nuanced approach to competition. We must hope that its efforts will fructify soon with a strong regulatory body and enforcing of the law

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