Competition policy: Costly neglect

The Economic Times, August 23, 2010

By Pradeep S Mehta

The recent spat between the Planning Commission and the road transport and highways ministry has highlighted one vital aspect: possible cartelisation of road builders due to stiff norms of qualification of bidders, which promotes collusion among a limited number of firms.

Cartelisation or other types of anti-competitive practices can be tackled under the Competition Act, 2002. But in such cases, if the same has emerged due to a government policy or praxis, action can hardly be taken, or if taken, chances of success are remote.

Let me illustrate. A policy measure with vast implications for competition is the imposition of an antidumping duty (ADD), which has been called a toxin by respected trade economists such as Bhagwati and Srinivasan. When imposed correctly, such duty helps prevent predatory or below-cost pricing by a powerful foreign competitor to eliminate competition from domestic or other suppliers and gain monopoly control of the market. Such imposition thus helps maintain contestability among players and, hence, competition in the relevant market.

When imposed incorrectly, ADD serves to insulate domestic suppliers from competition from abroad. In effect, this may do away with the compulsion for domestic producers to hone efficiency and remain competitive by international standards. In the short run, end-users and consumers suffer because they consume the product levied with duty at an enhanced price, though domestic producers and their input suppliers gain as these augment their market shares.

In the long run, such suffering is compounded as ADD, by building a protective cocoon around producers , restricts the downward or upward movement of price and quality resulting from efficiency improvements born out of competition.

The recent government recommendation for imposition of ADD on radial truck and bus tyre imports from China and Thailand and the resulting debates highlight all the dilemmas mentioned above. Such imports at low prices obviously benefit household consumers and end-users providing transport services, but they result in the contraction of sales of domestic rubber growers supplying Indian tyre manufacturers. The recommendation for imposition of ADD has been perceived in certain circles as an outcome of the demands of domestic rubber growers voiced through the Rubber Board.

Thus, there is a real danger that the pulls and pressures from potentially benefiting and losing stakeholder groups might lead to hasty decisions taken without an adequate and systematic scrutiny of sector realities and associated, potential welfare costs and benefits from imposition of ADD. Note that ADD helps to enhance competition in the long run and is justified only if there is predatory or below-cost pricing by the supplier. The scrutiny process, which constitutes the core of competition policy, thus necessarily has to compare import prices with costs corresponding to efficient production ā€” this may be done directly or by ascertaining the parity of international prices with import prices.

Similar comparisons are needed when safeguard duties are demanded by well-organised producers with consumers and end-users standing to lose, as in the case of aluminium products and antibiotics in India; when government contemplates continuation of its efforts to artificially render public sector enterprises viable through subsidies, at the expense of competitiveness of the private sector, with the overt objective of maximising employment; or while evaluating a draft anti-monopoly policy, as in the case of the Indian port sector, which tries to clip the wings of powerful but efficient players in a declared attempt to boost competition.

Competition law, well acknowledged and used as an instrument for boosting competition, is designed to punish and prevent anti-competitive practices ā€” acts of collusion among similar players or players linked to each other vertically in the supply chain, which aim to curb competition and its price-reducing and quality enhancing impacts. However, competition law is not the only instrument for boosting competition. Given that industrial, trade, labour and other government policies too might have competition reducing or enhancing impacts, a systematic appraisal of all such important government polices is in order.

Competition policy allows the government to weigh the competition distorting or enhancing effects of every important government policy against positive/negative impacts in regard to other issues that are in the public interest: employment, poverty alleviation, equality in income distribution, bridging of the gender divide, promotion of infant industry etc.

Given the vastness, diversity and complexity of the Indian economy and the varied policy interventions being undertaken by the government to promote development , a competition policy that undertakes distinct appraisals of different policies is imperative and would help maximise the over all welfare impact of government policy.

The need for implementation of competition policy has been acknowledged officially in the approach paper to the 11th Five-Year Plan by the Planning Commission . But subsequently, the momentum has slackened and the urgency for this instrument has been lost on our policymakers in the department of corporate affairs, in spite of hectic efforts made by us to convince them to move ahead.

The well-elaborated case of ADD on tyre imports and other cases touched on above illustrate the advantages of policy choice based on scrutiny of diverse welfare impacts , including competition rather than the pressures imposed by poorly-matched stakeholder groups. It is hoped that such efforts will help prepare the Indian stakeholder community and government for introduction and effective implementation of a formal competition policy.

The author is secretary general of CUTS International

Response

This article can also be viewed at:

http://economictimes.indiatimes.com/