V Anantha Nageswaran, the chief economic adviser to the finance ministry, on Friday said that while competition and free markets are associated together, there is a need to distinguish between the two.

“The benefits bestowed upon society as a product of competitive forces are often conflated with the effects of the operations of the free market. Free markets form the bedrock of economic theory as we know it today… But it’s important to distinguish between free markets and competition,” he said in his keynote address at the national conference on the Economics of Competition Law.

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He also noted that competition agencies must be mindful of the unintended consequences of their actions. Regulatory actions can also end up harming new entrants, he said, adding that what is done with good intent and with public good in mind can actually end up perpetuating dominance rather than removing it. Giving an example in the technology space, he said that regulators implement data privacy norms, granting users complete access to their data. “In such situations, users end up choosing only the large players since they face a greater degree of trust in them. This will ultimately lead to loss of competition across similar platforms, concentrating power in the hands of few firms,” he said.

He highlighted the role of competition agencies and regulators to create the conditions that can mimic a competitive market as otherwise “innovation and creative destruction will not happen”.

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He, however, also said that excess competition could be undesirable, including in sectors like banking, insurance and securities. “Competition factors that make other sectors more attractive can actually be a cause for systemic instability in these sectors,” Nageswaran said, adding that regulators and competition agencies should keep an eye on systemic welfare or lack of it. Banking and financial services sectors are subject to norms that promote competition among existing firms to keep interest rates fair and prevent market dominance.