National Competition Policy: Compete, not also-run

Economic Times, September 19, 2019

By Pradeep S Mehta

As India faces one of its worst economic slowdowns, it’s worth revisiting past efforts to deal with difficult economic situations through the lens of structural competition reforms.

The opening up of the economy in the early 1990s, doing away with licence raj, lowering of trade barriers and tariffs, and ushering in foreign investment by replacing the Foreign Exchange Regulation Act (Fera) with the Foreign Exchange Management Act (Fema) worked wonders to enhance competitiveness of domestic industry.

The adoption of the Competition Act in the early 2000s with bad conduct — not size — as its focus, and its full enforcement a few years down the line, helped to launch a renewed competition culture. This was complemented with disinvestment of government stake in public sector entities and subjecting them to market competition.

In its first term, the Narendra Modi government also showed an impressive appetite for competition reforms. While the goods and services tax (GST) was aimed at reducing unnecessary tax burden on enterprises and building one national market, the Insolvency and Bankruptcy Code (IBC) aimed to free locked-up capital and labour. The shift from input-based subsidies to direct benefit transfers into consumers’ accounts also corrected the artificial asymmetry created in the markets.

To counter the ongoing crisis, while the counter-cyclical measures recently announced by GoI may increase aggregate demand to some extent, they are unlikely to enhance competitiveness in the medium or long term. Conditions are now ripe for a new wave of competition reforms, whose beneficial effects will last long.

In 1995, the Australian government, faced with a similar economic situation, negotiated a National Competition Policy with its states and implemented it with rigour. In a few years, this resulted in a 5.5% jump in the national economy. Many other countries followed suit in adopting competition reforms.

Given that past competition reforms have primarily aimed to correct imbalances in the domestic economy, they were more piecemeal. India needs to ensure that the reforms are both inward-looking and outward-facing to enable the domestic industry to benefit from new challenges in the international markets.

On the domestic front, GoI will need to take radical actions on different sectors by doing away with special statuses and fiefdoms created over the years. For instance, special privileges to State owned enterprises will need to be done away with. GoI must reduce its stake in such entities to a significant extent and subject them to professionalisation and market competition. Merely merging a few banks will not do.

Banks and financial institutions must be made to compete with specialised credit-delivery vehicles and efficient bond markets to attract investors and borrowers by offering attractive rates and fair terms. GoI must compete with locations like Singapore and Hong Kong in providing a clear and predictable regulatory and taxation regime for entrepreneurs to start and run a business. The presumption of tax evasion, unless proven otherwise, will need to give way to a culture that offers clarifications and aids compliance.

To be able to compete globally, India’s corporate tax rates will need to be drastically reduced. Enabling exit is as important to ensure optimal competition as is facilitating entry. Fixing creaking judicial and quasi-judicial infrastructure to ensure speedy and effective dispute resolution will be crucial.

On the external front, a pragmatic and mature foreign policy now needs to be complemented with similar efforts to pursue economic goals. Conditions should be created to enable domestic industries to be part of global value chains by addressing their running problems, building necessary infrastructure and gradually depreciating the artificially overvalued rupee. Free trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP), must be executed and leveraged by incentivising domestic enterprises to effectively compete in existing export markets and exploring newer ones.

To ensure that reforms like GST result in desired benefits, rationalisation of rates and timely refunds will be key. Unintended consequences and unreasonable compliance costs, particularly for micro, small and medium enterprises (MSMEs), have been the Achilles’ heel of competition reforms.

There is a need to identify and correct such limitations in policies and practices across sectors. In this regard, a comprehensive competition assessment of sector-specific regulations and policies is essential.

Government departments and sector regulators will also need to be equipped with adequate capacity to prevent introduction of competition distortionary policies in the future. GoI can signal that it is ready to unleash a new wave of competition reforms by adopting the National Competition Policy, languishing on ministry of corporate affairs website since 2011.

As Nirmala Sitharaman is both finance minister and corporate affairs minister, she must not ‘waste’ the opportunity of the ongoing crisis to usher in structural reforms through competition principles.

(The writer is secretary general, CUTS International. Inputs by Amol Kulkarni)

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