Competitive neutrality in public policy

Business Standard, August 22, 2011

By Pradeep S Mehta

A number of competition distortions or impediments arise owing to our policy framework in different areas of economic governance

The Government of India has launched discussions on a draft national competition policy. Such a policy is needed to promote healthy competition in the Indian economy, so that growth is assured, inflation is controlled and more jobs are created.

As it is, a number of competition distortions or impediments arise owing to our policy framework in different areas of economic governance. As part of work on a competition policy, the government has undertaken an exercise to unravel the huge range of competition distortions, which may be over 3,000 if we consider the number of policies, laws, regulations and praxis at the level of the central government, state governments and local governments. Such an exercise undertaken in Australia in 1995 showed over 1800 distortions, which led to the first-ever comprehensive competition policy in Australia adopted by a government.

In pith and substance, all such distortions disturb the level playing field between the public and the private sector players. This is also called lack of competitive neutrality, which is one of the core principles upon which competition policy hinges. These cannot be tackled under the Competition Act, 2002 because they are not firm-level conduct issues, but are officially sanctioned anti-competitive practices. In a mixed economy like India’s, the issue is more critical since the government operates businesses in various sectors in competition with the private sector.

For instance, one per cent subsidy on agricultural loans is available to public sector banks but the same is not available to private banks. At the same time, asking private sector banks to expand in rural areas as part of their licensing conditions is unfair. On the other hand, such Reserve Bank of India (RBI) policies could be the result of the government policy to ostensibly promote economic welfare of the poor because public sector banks engage in government-sponsored schemes and have a good outreach (financial, geographical and so on). However, if the claim by private sector banks that they have started engaging in government-sponsored schemes is correct, then RBI’s direction will only stifle competition in the banking sector. This is because reduction in competition will not be offset by gains in public welfare.

Similar factors seem to be dampening competition in the energy sector. The coal sector is marked by an absence of deregulation, dominance of public sector monopoly and restrictions on commercial mining. In the absence of competition, the sector has become a breeding ground for inefficiency and production has suffered. Drawing from the positive experiences of oil and gas sectors, the government must open up the coal sector to competition from private players.

It is, however, important not to be confined to distortions that strictly fall within the ambit of such comprehension. There are cases of reverse competitive neutrality too, where the private sector has been favoured against the public sector, for extraneous reasons. For example, the closure of three vaccine producing public sector undertakings on curious grounds, or the travails of the aviation sector with discriminatory treatment in favour of private airlines. There are many other instances that call for adequate attention, so that public sector players are not left to bleed at the hands of some government policies.

In January 2008, the ministry of health and family welfare closed down three public sector vaccine manufacturing units on grounds of non-compliance with Good Manufacturing Practices. The three units were: the 103-year-old Central Research Institute, Kasauli; the 100-year-old Pasteur Institute of India, Coonoor; and the 60-year-old BCG Vaccine Laboratory, Chennai. The resultant impact on consumers has been catastrophic since these units accounted for over 70 per cent of the vaccines needed for the country’s Universal Immunisation Programme. The number of adverse effects from immunisation deaths among children has risen four times since the three units closed down — it was reported to be 128 in 2010.

Moreover, following the closure, the vaccines were procured from the private sector in addition to those supplied by the World Health Organisation. In the absence of the supply of vaccines from the public sector, competition in the healthcare sector has stifled and the cost of vaccines in the domestic market has gone up by 50 to 70 per cent in the two years since the closure of the units. Evidence has shown that private players offered vaccines at competitive prices before the units closed down, after which the government has been seen to steadily pay higher prices to procure vaccines from them to this day.

Similarly, for many years public sector airlines have been trying in vain to procure aircraft to expand their fleet. As a result, a lot of unused bilateral traffic rights have been allocated to those private airlines that have been allowed to operate international services. Instead of giving Air India the permission to buy aircraft, the ministry allowed Jet Airways to open international services that operated only on commercial routes already serviced by Air India. It may be concluded that the state-owned airlines appear to have been deliberately dumped to allow the private sector to consolidate.

Pradeep S Mehta Secretary General, CUTS International

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