Getting some competition for efficiency

June 13, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The Ministry of Corporate Affairs has taken the initiative to bring all sectors of the economy under the purview of the Competition Commission of India (CCI), including those overseen by regulatory authorities.

Even before the Group of Ministers could consider this proposal, the Department of Telecommunications and the Department of Financial Services have sought exemptions, possibly threatened by the encroachment on their territory.

The presumption is that the regulator takes care of all issues and consequently no other agency can have a role. But CCI is not a regulatory body — it’s a watchdog. All it would ensure is that enterprises play the competition game by the rule and do not erect barriers that could jeopardise the interests of the consumer.

Competition presumes freedom and its objective is efficiency. It is only in a competitive market that managements are forced to use appropriate technology, optimise labour and organise smooth distribution. All that lowers costs to industry and prices to the consumer.

Mere number of competitors in any industry does not ensure efficiency. When the Industrial Development Policy was in operation before 1991, the Ministry of Industry made sure that production capacity was split among at least four enterprises. The result? Consumers had to pay higher prices because enterprises could not avail economies of scale.

There is also an implicit assumption that the public sector is sanctimonious and therefore beyond the test of competition.  This has made competition between public and private sectors unequal and encouraged inefficiency in public sector enterprises. Take Air India. Had it been in the private sector it would have been wound up a long time ago.

The reforms which came since 1991 have brought back a fairly competitive market. If genuinely tended further, the market can be the best regulator. That is what has happened in most other countries and ensured efficiency and therefore better quality and lower prices. There is enough evidence about that even in our country. Take telecom. Today, the common man has access to telecom facilities at most economical prices.

But mere exposure to competition in an industry is not enough. What is more important is to look at laws and regulations that restrict competition at the national level. This has been recognised and a National Competition Policy is intended to be formulated. The objective should be to lead to policies that ensure efficiency in internationally competitive markets. The best example is Australia.

We are far from that. There are a number of laws which were framed decades ago in an entirely different socio-economic context.

These have become irrelevant and even counterproductive. Yet, they set the boundaries for the market. Mumbai has been made a slum by the rent control act, the textile industry is sick because of labour laws, the electricity undertakings are loaded with losses due to price control and so on.

The Ministry of Corporate Affairs needs to look at not only the domain of CCI but the range of policies that impede competition in an open market economy.

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