Business Line, June 06, 2006

By Pradeep S Mehta

It is time the Government adopted a National Competition Policy as the mantra for implementing economic reforms

For raising prices abnormally the Government has come down on cement and steel companies. This reflects the distrust of market forces and reeks of the command and control regime. Indeed, both the sectors are riding a high demand curve, and therefore, also exploiting the situation.

On another note, the move to amend Indian Post Office Act, to provide monopoly to the Department of Posts over letters weighing less than 300 gm, is equally symptomatic of the Government’s distrust of the market. With such signals, economic reforms and liberalisation process are under severe test.

There are other indicators too that highlight the `policy vacuum’ in an era of economic reforms. It is, therefore, time the Government adopted a National Competition Policy as the mantra for implementing economic reforms (see “How to enhance growth and competitiveness,” Business Line, April 12). The policy could spell out competition principles to guide the government for integrating a competition dimension in all public policies. What are these principles?

Free, fair market process
The first principle: The Government should `ensure free and fair market process’. However, as the examples above show, policies are most often designed in such a way that they stall the market process or promote the welfare of some market players. In the context of the Postal Amendment Bill, for instance, discussions have got skewed to providing DoP with a monopoly based on weight criterion instead of considering the fact that a segmentation already exists between ordinary mails and express.

The second principle requires the Government to `foster competitive neutrality’, that is, through measures that ensure equal treatment to all market players, whether in private or public sector. In India, this principle is violated in both ways, that is, there are cases where government enterprises are given special advantages over their private counterparts (for example, the purchase preference policy that favours public sector). Similarly, there are instances, where public sector is disadvantaged vis-à-vis private competitors.

VAT: A big step forward
As per the third principle, the Government should `facilitate easy movement of goods, services and capital’ by adopting rules and regulations so that trade and commerce within the country is free and unhindered. VAT is a big step forward towards a single market for the country. Another effort is that of the agriculture produce and marketing law, though its implementation, like VAT, is dependent upon the will of the States.

Sometimes, for reasons of technology or other public purposes, competition is neither desirable nor feasible. In such situations, the Government is required to `ensure third party access to essential facilities,’ such as the creation of an access regime to an electricity transmission grid in order to create competition in the electricity sector. However, there are several cases where the access regime is thwarted by government actions. For instance, interconnection in telecom, in particular, to the state-owned BSNL network is a big problem. The Telecom Regulatory Authority of India has failed to ensure interconnection among service providers due to an ambiguity in the law. Consequently, growth in telecom services has been accompanied with an increase in inter-network congestion and poor quality of service. Over the years, the Government has set up sector regulators to `ensure a transparent, predictable and participatory regulatory environment’. However, most often, the government interferes in the functioning of the regulatory agencies in a manner that violates this principle. The power sector is a case in point, where continuous government intervention in regulatory decision-making has resulted in poor regulatory environment.

Related to this is the principle of `separation of policy-making, regulation and operation functions’, which becomes imperative to avoid conflict of interests. Unfortunately, the temptation to command and control still prevails within line-ministries, often leading to turf wars, reflecting the state of immaturity of the regulatory framework in India. The Government’s role as licensor, policy-maker and service provider in the telecom sector creates serious conflicts of interest.

IPR may have negative impact
Healthy competition encourages innovation. To provide incentives to innovate, firms are granted an exclusive right for a certain period for commercial exploitation. However, the existence and exercise of intellectual property rights (IPRs) may generate anti-competitive effects through the monopoly power granted to holders of these rights. In this context, the Government needs to `balance competition and IPRs’ through appropriate policy and law. Accordingly, in several countries, abuse of IPRs is covered under competition law to ensure the required balance. However, in India, IPR laws such as the Copyright Act or the Trade Marks Registration Act have overriding powers over the Competition Act in matters related to IPR abuses. This is a huge gap in the law.

There are a few other principles too. But even if one looks at the examples given above, it shows that most often, the Government deviates from competition principles to protect `public interest’ — an issue that is open to weird interpretations, and ultimately the policy ends up protecting some vested interest. It is important to `publicly notify and justify such deviations and implement them in a transparent manner’.

Often such policies have laudable objectives, but instruments used to achieve the objectives thwart the competitive process. In the case of education , subsidies need not be given to schools directly; rather students can be given vouchers, which schools should be able to cash. This would provide incentives to schools to improve quality and attract more students, in order to get more vouchers.

The above assessment of the state of adherence to the `competition principles’ does not present a rosy picture for India. Violation of these principles exists in several measures adopted by the Government at all levels. It is imperative that the government (Centre as well as States) adopts these principles to complete and enhance the process of economic reforms. The goal of 10 per cent growth will then be within reach.

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