India’s uneven playing fields

Business Standard, December 14, 2012

By Pradeep S Mehta

Competitive neutrality is a minimum condition for effective mixed markets, for which the government needs to adopt and implement the National Competition Policy quickly

Since reforms began in 1990s, the government deregulated sectors that were hitherto the exclusive preserve of the public sector — such as airlines, telephones, insurance, banking and so on. In most cases, however, the government did not privatise any of the state enterprises, but made them face competition from the private sector. Such a policy then requires healthy competition between private sector and public sector firms by providing a level playing field. Alas, in many cases, the government adopts positive discrimination for state enterprises, thus violating a competition policy principle of competitive neutrality. In order for our economy to function well without any distortions, the government has to be neutral. The proposed National Competition Policy calls for such a policy response.

As the Organisation for Economic Cooperation and Development defines it, competitive neutrality is a principle in market competition, which implies that no business entity is advantaged (or disadvantaged) solely because of its ownership. This is a significant element of a country’s competition policy and countries such as Australia, the UK, the US, among others have consistently advocated for the importance of this principle. The draft National Competition Policy in India lays down certain principles on which competition policy be hinged and includes competitive neutrality as one. Unfortunately, despite little debate on its significance in any market setting, evidence of its violation continues. For example, while railway container operations allowed private players to operate, the dice is always loaded against them vis-a-vis the state-owned Container Corporation of India, or Concor. Or, the preferential treatment granted to Air India with respect to the allocation of traffic rights and access to government funding vide laws, regulations, and practices is an example.

On the other hand, Air India has also suffered from lack of competitive neutrality in the past. For many years, public sector airlines, which included then Indian Airlines, were trying in vain to procure aircraft to expand their fleet. As a result, many unused bilateral traffic rights have been allocated to those private airlines that have been allowed to operate lucrative domestic and international services. Instead of giving Air India permission to buy aircraft, the ministry allowed Jet Airways to open international services that operated only on commercial routes already serviced by Air India. Another similar instance of reverse competitive neutrality was seen in the case of the closure of the three vaccine manufacturing public sector units on questionable grounds, followed by sole reliance on private players by the government, which has now been revoked after much hullabaloo.

The principle that the playing field should be levelled between state-owned enterprises and private firms is also true in the reverse. It is not only about potential disadvantages faced by the private sector when it competes against state-owned enterprises – which is how it is commonly understood – but the reverse as well. In an earlier article in Business Standard*, I have argued how this happened. No prizes for guessing that the rent-seeking behaviour of politicians and malleable babus allowed all this to transpire.

Despite being an essential ingredient for a successful competition regime, India is seeing several instances of distortion of this principle across its various sectors. In the recent past, there have been many such cases.

Earlier this month, the Association of Power Producers complained about the discriminatory treatment against Coal India’s draft fuel supply agreement ( FSA), which they allege favours state-run companies. The draft grants the option of arbitration regarding FSAs only to government companies among other one-sided clauses.

Similar concerns arose in the energy sector where the private fuel retailers shut outlets alleging a non-level playing field and a price differential of Rs 3-8 a litre on petrol and Rs 15-20 a litre on diesel, compared to rates of public sector competitors. The government has not ensured a level playing field since it has invited investment by private players, and it has gone back on the withdrawal of the administrative pricing mechanism. Another problem pertains to the grant of subsidies being provided on oil products. Besides the harmful effects of these subsidies on competition and the environment, these are only available to public sector companies and not to private players.

Similarly, the capital market regulator, Securities and Exchange Board of India ( Sebi), recently announced its plans to amend its investment policy. It now parks its surplus funds in fixed deposits of state-owned banks only, even if the returns offered by them are lower than that of private banks by up to 10 basis points (0.1 per cent). According to the recent decision, Sebi would prefer to deposit its surplus funds with public sector banks, even if the rate of interest offered by them is less than the returns offered by private sector banks. The recommendations, which came from Sebi’s committee of executive directors, intend to scrap the current pro-competitive policy that involves competitive bidding between both public as well as private sector banks. The argument offered in favour of the amendment adds insult to injury by saying that was being done “to ensure safety of funds”. A similar directive was once issued by the Reserve Bank of India to public sector companies that they should park their funds only in state-owned banks.

Over the past decade, there has been a rise in the number of mixed markets and with it, an increasing need to have a level playing field for market players. There may be several reasons for having a mixed market economy that acknowledges the significant roles played by both private and public sectors. However, where competitive differences do not reflect underlying differences in costs or objectives, such as where regulations or taxes apply differently to private and public sectors, there may be a risk that the market will not operate perfectly owing to resources being used inefficiently. The application of competitive neutrality and any deviation from these principles, therefore, should always be subject to the condition that the benefits outweigh the associated costs. For this to happen soon, the government needs to adopt the National Competition Policy and implement it.

The author is Secretary General, CUTS International. Natasha Nayak of CUTS contributed to this article.

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