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Economics of Competition Policy in India: Emerging issues

Dr Rajeev C.Bharathan, Former Associate Professor of Economics, Government College, Thrissur Background Generally in economics, competition is seen as rivalry among firms for a larger share of the market, which leads to efficiency in production and lower prices for the consumers. Competition can be defined as a process by which cost efficient production is achieved in a structure where entry and exit are easy, a reasonable number of players (producers and consumers are present) and close substitution between products of different players in a given industry exists. As regards the impact of competition on economic growth there are numerous studies which in essence argue that it has a positive impact .Bayoumi et al. (2004)1have estimated that the differences in levels of competition can account for over half of the current gap in GDP per capita between the Euro area and the United States. They conclude that more intense product market competition could help in achieving higher growth and increasing employment rate. Aghion et al (2001)2, through an endogenous growth model, show that competition has a positive effect on growth. I t is often posited that competitive market ensures quality, lowest prices, efficiency in allocation and adequate supplies to consumers. The following three conditions are essential for this to be true: Competition: there are a large number of producers supplying the same product, or close substitutes, and no single producer dominates the market place Full information: all consumers are fully informed about the options that the market offers them

Bayoumi, T. Laxton D. and Pesenti P. (2004), Benefits and Spillovers of Greater Competition in Europe: A Macroeconomic Assessment, Working Papers.

Aghion, P., Harris, C., Howitt, P. and Vickers, J. (2001), Competition, Imitation and Growth with Step by- Step Innovation, Review of Economic Studies 68.
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 Low switching costs: the costs a consumer faces in switching from one option to another is not high enough to deter this switch However, as the real world markets do not satisfy any one of these conditions; competitive markets may not exist. The factors responsible include situations where: 1. Producers/Sellers adopt unfair means to restrict competition and hurt other Producers/Sellers and the consumers 2. Markets fail due to externalities, imperfect or asymmetric information, and economies of scale and scope 3. Government policy often may be inadequate to ensure proper functioning of markets The first two factors require some form of intervention in the market process. The third factor requires fine-tuning the government policy and its implementation to facilitate the working of markets3. Thus we can argue that governments have to adopt and implement policies for the smooth working of the markets. No democratic government can step away from this crucial responsibility. This is the rationale for introducing appropriate competition policy to uphold the interests of consumers. However certain scholars like Koedijk and Kremers (1996)4 find a clear negative relationship between government regulation and economic performance in 11 European countries. In this background let us analyse the status of the Competiton policy and law in India. Before embarking on that let us make a distinction between competition law and competition policy. Competition law and Competition policy Competition law is a narrow concept that centres on the legislative aspect of boosting competition. It is the enactment of the competition policy and achieves its objectives in three ways: (1) Prohibiting anti-competition agreements and practices that harm free trade and competition; (2) Preventing abuse of dominant position and anti-competitive practices that lead to such a dominant position; (3) Regulating mergers and acquisitions.
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For details of conduct and performance of markets, see Scherer and Ross (1999) Koedijk, K. and Kremers J. (1996), Market Opening, Regulation and Growth in Europe, Economic Policy, No. 23.
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Competition policy is a broad concept which harmonises all the following public policies: *Foreign trade Policy *Industrial Policy * Disinvestment Policy * Foreign Direct Investment Policy * Fiscal Policy * Intellectual Property Rights Policy * Labour Policy * All other Policies affecting competition The principal objective of competition policy is to foster competition as an instrument for accelerating growth. The policy is meant to fuel innovation and create market efficiencies that offer better products and lower prices thus benefiting consumers and maximising welfare Competition policy is a critical component of any overall economic policy framework. Competition Policy is intended to promote efficiency and to maximize consumer/social welfare. It also helps to promote creation of a business environment which improves static and dynamic efficiencies, leads to efficient resource allocation and in which abuse of market power is prevented/curbed. There are two components of a comprehensive Competition Policy. The first component involves putting in place a set of policies that enhance competition or competitive outcomes in the markets, such as relaxed industrial policy, liberalized trade policy, conducive entry and exit conditions, reduced controls and greater reliance on market forces. The other component of Competition Policy is a law and its effective implementation to prohibit anti-competitive behaviour by businesses, to prohibit abuses conduct by dominant enterprise, to regulate potentially anticompetitive mergers and to minimize unwarranted government / regulatory controls. To strengthen the forces of competition in the market, both competition law and competition policy are required. The two complement each other. Competition law prohibits and penalizes anti-competitive practices by enterprises functioning

Competition policy in India In India, the Competiton Act 2002 was passed in 2003 and came in to effect in 2008. However, the committee to frame a Competiton policy was constituted only in 2011.A draft National competition policy has been placed in the Ministry of corporate Affairs website inviting comments and suggestions.5 Honourable Corporate Affairs Minister Veerappa Moily revealed that the Competiton policy would be getting cabinet approval by March 2012.According to him, the policy would bring in a financial revolution in the country. He also said that the national Competiton policy might have a lot of benefits to the consumers referring to the consequences of Competiton policy in USA on petroleum products. (It is reported that the price of petroleum products had been halved in USA)6 The aim of the competition policy is to create a framework of policies and regulations that will inform other policies to facilitate competitive outcomes in the market. Competition policy is a critical component of any overall economic policy framework. Competition policy is intended to promote efficiency and to maximize consumer/social welfare. It also promotes creation of a business environment, which improves static and dynamic efficiencies, leads to efficient resource allocation and consumer welfare, and in which abuse of market power is prevented/curbed. It also promotes good governance by restricting rent seeking practices of economic actors. (Extract from Para 11.23 of chapter 11 of the Policy document Inclusive growth, Draft Eleventh Five year Plan) When we read the above lines, we feel happy that at last the State has taken a strong decision to maximize consumer welfare by controlling the corporates in India. However the experiences of the past two decades make us to doubt the true implications of these policy measures. The Indian State at the time of writing the Constitution was to a limited extent a democratic socialist state. That is why our forefathers emphasised the community welfare in Articles 38 and 39 of Directive Priniciples. The State always attempted to regulate the economy up to 1990 by various
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< www.mca.gov.in/Ministry/Pdf/Draft_National_competition policy.Pdf > accessed on 9-03-2012 The Hindu dated 6-02-2012,Calcutta

legislations and policies in order to increase the State control over allocation, production and distribution of resources. The 1991 saw a reversing of the state policy by embracing on liberalisation, privatisation and globalisation. I like to argue that Indian state has shed its pseudo socialistic stance and fully accepted free market mechanism due to external pressure for accelerating her economic growth. It is true that our economy has achieved impressive economic growth rates since the late 1990s at the cost of social welfare. Emerging Issues Agricultural markets Agro commercial firms charge higher prices from consumers though they procure agricultural produces from farmers at very low prices. Thus there exists huge gap between market prices and producer prices. Agricultural produce market regulation Act is expected to safeguard the interests of farm producers. The question is how far competitive is the agricultural markets in India. Manufacturing After economic reforms in 1991, market concentration increased in certain industries 7. There emerged two or three dominant firms in the following product markets: *Polyester Staple fibre (Reliance 54%) *Viscose Staple fibre (Grasim 91%) * Soft drinks (Coca-Cola 62% and Pepsico33%) * Cement market is highly fragmentd.Two or three firms dominate each of such markets * Pharmaceuticals Consumption pattern is decided by doctors and drug companies as this market is an asymmetric information market. In the case of K.S Gopinath vs. Govt of India, Supreme Court has directed govt to ensure that essential and life saving drugs do not fallout of price control *Information Technology Hardware There is a strong competition among Indian brands, foreign brands and non branded sector Software Microsoft operating system controls over 90 percent desktop software market. The adoption of open source software can make soft ware market competitive
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See Pradeep S Mehta (2008) State of competition in India, Presentation made to Planning commission Working group on competition

*Energy Coal State controlled market Petroleum Dominance of state controlled firms. Lack of transparency in pricing .Prices are administered by Ministry Power State controlled Concluding observations Competition policy is a complex, cross-cutting policy instrument which is affected by a number of interconnected factors. Its effective implementation requires a holistic and integrated mind with ability to hold two opposing views in mind and still have the capacity to function. Its practitioners, more than anyone, need to be men of significant learning, learning more than a mere accumulation of facts and presentation of a carefully constructed argument couched in legal rhetoric. Further there should be a strong state that supports the legal provisions protecting the common man. It is in this context, civil society and social activists are constantly voicing their concern of the Indian State becoming more interested in corporates rather than the livelihood and basic problems of the citizens. The state cannot remain a witness by passing legislation but has to resort to active intervention by pursuing the following actions: 1. Evaluate all laws and public policies in the light of standard criteria of competition. 2. All public policies should have an explicit statement on the likely impact of the policy on competition. 3 State/Union governments should introduce a system of competition audit which could be applied to all existing and future policies. For feedbacks contact me

rajeevcb@gmail.com 919446452022(mob) 04872382630(Res)