‘Competition policy will motivate everybody’

Dhanendra Kumar, a former chairman of CCI in conversation with Governance Now

sweta-ranjan

Sweta Ranjan | January 6, 2012




Youngsters today will have a difficult time imagining long waiting periods to get a telephone connection or buy a scooter. Today, the service providers are queuing up before the consumer. That is the power of competition. But much more needs to be done to curb monopolistic tendencies and promote genuine competition. The Competition Act was passed in 2002, and the Competition Commission of India (CCI) has been set up. Now it is time for a pro-active national competition policy (NCP) which is being drafted by a committee. It is headed by Dhanendra Kumar, a former chairman of CCI who previously served as secretary to the government in charge of defence production, road transport and highways and culture. In an exclusive interview with Sweta Ranjan, Kumar delineates the contours of the proposed policy.
 
Why a national competition policy?
We all understand that competition is good for economy. It brings greater efficiency in economy. It is good for consumers because it brings to them the availability of goods and services, at lower prices with better quality, wider choices. It has been observed through experience all over the world that competition has resulted in the best outcomes in various segments of economy.

We already have the Competition Act and the CCI to administer it. Why do we need a competition policy?
Let us look at the genesis of the Competition Act and the report of the Raghavan committee which recommended establishment for the whole regime. It recommended formulation of an NCP which is an overarching policy framework from which is born the Competition Act. The Competition Act is one of the many subsets of a wider competition policy which is an expression of the government’s intent of the adherence to the competition principles. The CCI is meant to enforce the Competition Act and to take punitive measures in case of its violation and anti-competitive practices like formation of a cartel or anti-competitive agreements or abuse of dominance. These are the negative consequences of violation of the law. But the positive, proactive and promotional elements fall within the domain of the competition policy. 

In that case, the competition policy should have come before the Competition Act.
Ideally speaking, yes. The competition policy could have come earlier. But it has not really created any problem in the sense that the government has been following, in a way, the same principles of competition post 1991. Liberalisation unleashed competitive forces in the various sectors of economy. Even when there was no written competition policy, the opening up of various sectors in regimes – telecom, manufacturing, auto or gradually civil aviation, infrastructure, PPP – means opening up of these sectors to competition. 

Then why have a formal competition policy at all?
The advantage of having a written competition policy is that it enunciates a firm policy of the government to adhere to certain competition principles on a harmonious basis within various sectors. If this kind of a mandate through a policy of the government goes to various segments of economy, they would do a number of things. For example, despite liberalisation there are a number of residual elements in laws, in systems and procedures which are still giving rise to anti-competitive outcomes. Even in other socialist countries like Russia... because you can’t suddenly overturn the whole socialist system into an open market economy. It takes time. If you have a holistic policy statement in position in all ministries, all sections of economy would be expected to undertake a close review of their policies, laws, systems and procedures – whether they confirm to the competition principles.
Take sugar mills for instance. No new sugar mills can come up within a radius of 15 km of an existing sugar mill. No licence can be granted. There may be very solid and sound reasons for this but if there is sufficient amount of sugarcane within that radius which can justify another sugar mill to come up, why have this restriction? Nobody is going to invest and no financial institution will finance a mill unless it is viable.
Through the competition policy everybody would be motivated and encouraged. All the ministries, secretaries, PSUs, state governments, municipalities would be encouraged to adhere to competition principles. It will have a number of advantages. For example, savings in government expenditure in procurement, also procuring the best goods and services for the government on competitive prices and curbing any anti-competitive practices like collusive bidding and bid rigging.

It was believed that anti-competitive outcomes arise due to market operators. But now it is argued that the government too could be restricting free and fair competition. How does that happen?
Take the case of the tyre industry. In 2005 anomalies in the tariff regime – a higher import duty on raw materials than on finished products – led to market distortions, adversely affecting domestic manufacturers. The import duty on natural rubber was 20 percent and the duty on imported finished tyres is only 10 percent. This led to a higher cost of tyre manufacturing in India and therefore, cheaper tyre imports, in particular from China, affecting the profitability and market share of domestic manufacturers. Take the case of procurement-related distortions. Preference to public units in the procurement of goods and services creates an uneven field for private sector players and distorts the market.

So, the proposed competition policy aims to iron out the distortions created by some of the policies of government itself?
The aim of the competition policy is to create a framework of policies and regulations that will conform to other policies in order to facilitate competitive outcomes in the market. The competition policy is a critical component of any overall economic policy framework. The competition policy is intended to promote efficiency and maximise consumer and social welfare.
What would be the best mechanism to bring harmony among all aspects of government policies so that they are least restrictive of competition?
There are two ways of doing it. One is to have a competition policy in place along with an institutional mechanism to see (other) governmental policies and their implementation from the lens of the competition policy. The other is to undertake advocacy with the government departments, regulators etc, both at central and state levels, so that they are able to take into account the principles of free and fair competition while making policies and procedures. There is a need to work on both fronts.

Will there be any mechanism to oversee the implementation of the competition policy?
Given the wide canvas of the NCP, the committee has also found it necessary to set up an institutional arrangement for monitoring the progress of the implementation of the policy. A competition policy oversight council can be set up which would be autonomous in its functioning. The National Competition Policy Council (NCPC) can be a body with adequate resources and expertise which can help the ministries to undertake competition impact assessment of every policy or procedure or law or regulation. It is possible that you may like to impose a certain restriction on competition but it has to be for a sound public policy principle.
The NCPC will actively engage with all stakeholders to promote competition in government action as well as in the conduct of business.

How does one ensure the financial and functional independence for NCPC and also make it accountable?
This is indeed crucial for the success of the competition policy and we propose to make specific recommendations in our report to the ministry of corporate affairs.

How will NCPC function at the state level?
The initiatives at the state level will require pro-competition reforms, keeping in mind the principles of NCP. There are many economic areas of state policies and regulations that impact competition. These restrictions also tend to fragment the national market and undermine the freedom of economic actors. The state governments should be encouraged to undertake a review of existing policies, laws and regulations from the competition perspective and also undertake a competition impact assessment of proposed policies, laws and regulations before these are finalised; while seeking expert assistance of CCI and other expert agencies. All state governments have, at the instance of CCI, established nodal points within their administrations to deal with the subject of competition.

Is there a proposal for incentives to states under NCPC?
An incentive scheme can be instituted by the government under which financial grants may be given to state governments linked to the progress in aligning their policies and laws with the principles of NCP.

How will it be ensured that the NCPC will function without creating confusion or overlap with the CCI?
To strengthen the forces of competition in the market, both the competition law and competition policy are required. The two complement each other. The competition law prohibits and penalises anti-competitive practices by enterprises; that is, it addresses market failures. Sector regulatory laws mimic competition in the areas of natural monopolies. Other regulatory laws, such as those for intellectual property or anti-dumping or even capital markets, too have an important interface with competition. CCI is an enforcement body with powers to curb anticompetitive practices in the market place, while the NCPC will be a high-level body to persuade adoption of healthy pro-competitive policies.
CCI has the power to advocate on policy only when asked for by a government agency, but its opinion is not binding. The NCPC will have proactive powers to advocate for change on policies which result in anticompetitive outcomes. Both CCI and NCPC can work in tandem complementing each others’ functions rather than creating overlaps.
CCI, being a young agency, will be too busy in enforcement activities and will not have the resources or the authority to advocate policy changes. The NCPC is designed to be a quasi-government policy advocate with the wherewithal to research and submit strong advisories for corrections in policies. Even in Australia, there are two bodies and there is no conflict between them. 

Are we going to follow the Australian pattern?
We are not going to blindly follow any particular model. We have studied all the competition policies around the world. But any competition policy which should be adopted by India should respond to the Indian conditions. We are also conscious of what many other countries have done. We have suggested the distilled version of what we felt could suit the Indian condition. We are also going to take various consultations with various stakeholders, consumers, industries, businesses, think tanks, economists. After all this is done the final draft would be submitted to the government.

This interview first appeared in the December 1-15 issue of the Governance Now magazine.

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