India badly needs a National Competition Policy, it is essential for growth in a free market economy

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August 22, 2020 7:00 AM

There is an urgent need for deeper and long-term economic reforms which can, inter alia, enhance competitiveness by eliminating distortionary market practices to usher economic growth across sectors.

India has failed to introduce a culture of fair competition in our markets, an essential ingredient for the success of a free-market economy.India has failed to introduce a culture of fair competition in our markets, an essential ingredient for the success of a free-market economy.

The Prime minister’s vision of achieving a $5-trillion economy by 2025 seems to be under a cloud. The Rs 20-lakh-crore economic package to stimulate growth during and post Covid-19 crisis may take time to bear fruits. However, current macroeconomic indicators do not support the initial euphoria. Moody’s downgraded India’s ratings-outlook from ‘stable’ to ‘negative’ in November 2019, Fitch Ratings released in May projected a 5% decline in growth; even IMF’s recent report on June 24 has projected India’s economy to contract by 4.5% in FY21. IMF has also slashed India’s growth rate to 1.9% in FY21. There is an urgent need for deeper and long-term economic reforms which can, inter alia, enhance competitiveness by eliminating distortionary market practices to usher economic growth across sectors. India has failed to introduce a culture of fair competition in our markets, an essential ingredient for the success of a free-market economy. Why has this not happened so far? Let’ us look back for a while.

The 1991 reforms introduced the concept of “free markets” to India. They were aimed to gear up the economy to face competition from within as well as outside. This brought competition into the Indian markets, and the benefits, both in terms of faster economic growth and consumer welfare, are clearly visible. For the first time since independence, the ordinary Indian consumer has become sovereign, and enterprises now compete for his patronage, particularly in some sectors like telecommunication, aviation, consumer electronics, automobiles, etc. In sectors like power, ports, mining, electricity, railways, etc, the benefits of competition are yet to reach to the consumers.

It is time for India to have a National National Competition Policy (NCP). Competition policy refers to “those government measures that directly affect the behaviour of enterprises and the structure of industry” to maximise total welfare, i.e., the total of consumer’s surplus and producer’s surplus, as well as taxes collected by the government. However, to be effective in a democracy, such policies should have the cover of the law. The Competition Act, 2002 (Act) which replaced the archaic MRTP Act, 1969 already exists to provide the statutory cover for the NCP. Control of anti-competitive agreements and prevention of abuse of dominant positions by large enterprises, regulation of combinations and competition advocacy are broad thrust areas under the Act. CCI is the statutory body created to enforce the Act, with a mandate to preserve, protect and promote competition in Indian markets. Although enacted in 2002, the Act was brought into force in a phased manner since May 2009. But we have not utilised CCI’s full potential due to the absence of a national competition policy. National competition policies proved a key structural reform to boost economic growth in many developed countries.

In the absence of NCP, the benefits of competition are yet to reach all the sectors. Sectors like coal mining have been under monopoly control of the state via PSUs like the Coal India. Other ostensibly “open” sectors have not been able to reap the benefits of competition due to strong governmental interference, particularly the power sector. Although the Electricity Act, 2003, enacted simultaneously with the Competition Act, introduced bold legislative reforms, such as mandating competitive-bidding, open access etc., these measures have remained in the statute book, largely, due to absence of financial autonomy to the now ‘unbundled” State Electricity Boards and also due to political interference by the state governments in their day-to- day functions. Similarly, public procurement, which constitutes approximately 20-30% of our GDP, continues to be infested with cartelisation. No serious attempt has been made except for occasional references made by some large public procurement organisations such as DG S&D, Railways, FCI, etc., to CCI. This appears to be partly due to corrupt nexus between politicians, government officials & bidders and partly due to a general ignorance towards benefits of competition. This apathy and ignorance can be best cured if India adopts NCP as a part of its Directive Principles. NCP will ensure each policy regulation and law is screened based on impact, if any, on the state of competition. However, this requires a strong political will.

A 2014 report of OECD, concluded that effective competition policy could result in an extra 2-3% growth. Australia demonstrated this in 2005. Apart from Australia, competition policy has also been adopted and implemented by the UK, Denmark, Italy, Turkey, Mexico, Hong-Kong, Malawi and Botswana. Recently, the Philippines adopted NCP. In India, however, a draft NCP, formulated in November 2011, is gathering dust in the files of the ministry of corporate affairs, despite the three-year agenda of the NITI Aayog recommending comprehensive competition policy reforms.

Recently announced initiatives to introduce limited privatisation of Indian Railways for select routes for passenger train services indicates growing realisation of the importance of introducing competition in the public sector. But such ad hoc initiatives must be institutionalised and implemented after the adoption of a well-considered and thoroughly debated NCP, which will be a challenge since PM Modi will have to build a national consensus.

Author heads the Competition Law & Policy practice at Vaish Associates Advocates.
Views are personal

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