Published: The Economic Times, May 10, 2003

By Pradeep S Mehta

It’s often difficult to assess the link between competition policy & law and economic development. However, several studies have shown how a competition law has enabled the growth process by conserving scarce resources and aiding the growth process in the economy.

For example, a study carried out for the Australian economy estimates the benefits to be expected from a package of competition promoting and deregulatory reforms (including extension and revision of competition rules) to incur an annual gain in real GDP of about 5.5%, or $23 billion where consumers would gain by almost $9 billion.

There would also be an increase in real wages, employment and government revenue. Despite such evidence, our approach to the proposed competition regime is to provide it with peanuts, under a mistaken notion that the presence of a regime will alone deter anti-competitive practices.

One will need sufficient resources to ensure that the agency is not another lame-duck. It can also pay for itself, and add to the national exchequer.

In Peru, a study of the competition agency’s effectiveness found that economic benefits due to its operations amounted to $120 million against operating costs of $20 million over a period of seven years.

A soon-to-be-published study in Korea establishes that, as against the cost of implementing the competition law of $18.4 million in 2001, consumer welfare increased by $527 million through price reduction and increased availability of goods from a monopolistic market structure.

The study also shows that the income transfer effect was about $536 million due to good enforcement of the competition law. This included damages and penalties imposed on violators.

So much about the economics. More importantly for a country like India, where there are so many poor people, a question is often asked as to how it will benefit the poor.

Other than macro benefits, some of which will trickle down to the poor, there are very clear linkages in a competition policy to help the poor directly.

This issue was touched upon by the World Development Report, 2000-2001: “Markets work for the poor because poor people rely on formal and informal markets to sell their labour and products, to finance investment, and to insure against risks. Well functioning markets are important in generating growth and expanding opportunities for poor people”.

“Well-functioning” implies markets that work efficiently and without distortions, i.e., competitive markets where everyone has the opportunity to participate. An example from Zambia supports the argument.

A large poultry firm in Zambia lowered its prices to such an extent that smaller firms and roadside tiny poultry sellers had to face ruin.

This action was checked by the Zambia Competition Commission. Tiny self-employed entrepreneurs continued to operate, thus protecting their livelihood.

Otherwise they would have slid back into the poverty trap. Zambia is a poor country with a GDP of $3.3 billion (1991), as against India’s $459.8 billion.

They enacted a competition law in 1995, with an outlay of nearly 0.05% of the total government budget, while India spent only about 0.0009% of the government budget in maintaining the old competition law.

Besides, the Zambian law was designed to operate on a ‘conduct’ approach rather than the MRTPA’s structural approach. The new law in India ā€” Competition Act, 2002 ā€” has also been fashioned on a ‘conduct’ approach, i.e., where behaviour is determined as competitive/non-competitive depending on conduct rather than size.

But there are very few people in India who would understand the change.

And if the government were to appoint retired civil servants and judges to the new Commission, then one can be reasonably sure that their understanding of the difference will be quite wanting.

For, they have been brought up with a command-and-control mindset. That will be bad for both the law and its ramifications on the economy.

That’s one of the reasons why I have been arguing incessantly that we need young professionals to man the new authority. It is sometimes argued that it will be difficult to attract young professionals on peon’s salaries.

The retirees are happy to work on such low salaries, because their old salary and perks are well protected. They also retain their old bungalows, as we have seen in many recent sinecure cases.

Law minister Arun Jaitley has come out against this pernicious system. He has been advocating that regulatory bodies should not become roosting places for retirees and that we need to pay market level salaries to attract good professionals.

If the government heeds his advice, then we can have a really effective competition regime. If that happens, then we can confidently look forward to achieving a higher growth rate.