The Hindu Business Line, April 12, 2006

By Pradeep S Mehta

Government policies need to be framed and implemented in harmony with the market process and not in a manner that stalls it.

The Prime Minister, Dr Manmohan Singh, has lately been talking about the goal of his Government to raise the GDP growth to 9-10 per cent. In spite of his doubts about the difficulty of reforms in a coalition Government, the Planning Commission chief, Mr Montek Singh Ahluwalia, has echoed the goal of achieving a higher growth rate in the Eleventh Plan (2007-12), but has hedged that we can think of something between 8 per cent and 10 per cent.

But to do this, it is not sufficient to focus on the “hardware” component of economic management (that is, development of infrastructure), but equal emphasis must be given to “software” (policies and practices of the government which shape the general economic environment). Alas, the latter is most often ignored.

Despite the several wide-ranging economic measures from the early 1990s, the economic trends reveal a not-so-rosy picture. The economy has grown at a rate well below its potential. Even the Tenth Plan targeted growth rate of 8 per cent per cent is going to be missed. The contribution of manufacturing to national income has remained stagnant, in spite of its potential to have the greatest impact on the economy. Expressing concern over the low share of manufacturing in the country’s GDP, the Prime Minister called for increasing this share.

An exercise was undertaken by the National Manufacturing Competitiveness Council to address this conundrum. However, the national strategy paper that it produced was more of “do-what” nature rather than “do-how” and lacked analytical rigour. As a result, it did not even produce any debate.

Lessons from abroad
Faced with a similar situation, the UK and the European Community had brought out white papers on competitiveness in 1994. Both emphasised the need to ensure fair competition in the market as an essential ingredient for enhancement and maintenance of competitiveness. These prescriptions apply to India as well.

To derive the full benefits of its economic reform agenda and ensure the development of a competitive economy, Australia framed a National Competition Policy in 1995 comprising a set of policy reforms adopted by the federal and provincial governments. The objective was to ensure that the same competition principles applied throughout the economy. Not surprisingly, studies have shown that the Australian economy has garnered an annual gain in real GDP of about 5.5 per cent.

In the case of India, even after liberalisation, government policies continue to be framed and implemented such that more often than not they thwart the market process and competition. There are several examples of such policy-induced anti-competitive outcomes.

For instance, despite trade liberalisation, certain elements of trade policy measures are anti-competitive in nature, such as anti-dumping that favours domestic firms; inverted duty structure that is, higher import duty on raw materials/intermediates vis-à-vis that on finished products, which affects domestic manufacturers of finished products and encourages suppliers of raw materials/intermediates, denting value addition in the industries concerned.

Hurting market process
Several rules and regulations of the government hinder the proper functioning of the market process. One example is from the coal sector: Although pricing freedom has been given to the coal producing companies, distribution of coal is still controlled by government agencies, and only they are allowed to sell coal directly to consumers.

In several instances the government has fallen short of taking adequate measures to ensure fair market process and competition. The highly desired competitive neutrality is missing. Recently, the Railways opened up container transport to private operators, who will have to compete with Concor, a wholly-owned subsidiary of the Railways, and be dependent on the Railways to access tracks and engines to keep their rolling stock moving. This calls for a transparent and non-discriminatory access regime to ensure that the Railways does not squeeze out the private competition. But this framework is missing from the Railway Minister’s announcement!

In the telecom sector, for instance, interconnection for private telecom operators into the BSNL network is problematic. This has led to inter-network congestion and poor quality of service to consumers.

Not right instruments
Often, policies that deviate from competition principles are framed to address some socio-economic concerns. However, the instruments used to achieve what are otherwise laudable objectives are not the best ones.

Currently, the food subsidy policy uses the MSP-PDS operations to serve the “conflicting” objectives of ensuring remunerative price to farmers and providing the foodgrains so procured to the poor at affordable prices. By implication, this entails a huge gap between the purchase and the issue price, and consequently a larger subsidy bill. The need of the hour is to separate the procurement of foodgrains through MSP mechanism from the PDS operations. Procurement of foodgrains for distribution to poor through PDS could be done through competitive bidding, which would minimise the cost of procurement.

Systemic distortions
The Union Cabinet has, instead, taken the decision to hike the issue price of foodgrains and reduce the quantity of foodgrains offtake through the ration shops. The systemic distortions in the operation of food subsidy policy continue to remain unaddressed.

Thus, most of the time, as policy outcomes are sought to be generated, it is a practice in India to do so without bearing in mind that policies need to be framed and implemented in harmony with the market process and not in a manner that stalls it. There is a lack of coherence in various government policies, highlighting the state of `policy vacuum’.

What is required is the need to acknowledge the institution of the market. It is, therefore, time the Government adopted a National Competition Policy as the mantra for implementing economic reforms in the country.

It would help rationalise the role of the Government so that its intervention facilitates the functioning of markets and leads to higher levels of growth. Only then will a 10 per cent growth be possible.

This article can also be viewed at: