Too important to leave aside

Published: Financial Express, India, March 31, 2007

By Pradeep S Mehta

Looking at these conditions, it appears that the central and various state governments have taken the right decision to encourage the setting up of SEZs and this policy is consistent with the National Foreign Trade Policy of India, 2004-09. Let me highlight three most important conditions in the Indian context. The first condition is that agricultural productivity must rise at a rate sufficient for the production and marketing of food to be able to feed the entire population. This requires continuous technological progress in agriculture, and institutional and organisational changes, including land reforms.

Second, the growth rate of industrial labour force must be faster than the growth rate of the total labour force. Over the last couple of decades, industrial employment in India remained stagnant and in order to change this situation, we need both large-scale capital accumulation and a labour bias in innovation. The policy of developing a large number of SEZs meets both these conditions.

Third, a right balance must be struck in inter-sectoral labour markets. The number of new employment opportunities created in industry must be in step with the number of persons released from agriculture.

If the above is true, then why there is this huge controversy over this new wave of SEZs in India? The first reason for this controversy is that a large number of actors look at this situation as a milch cow to seek rents. Second, besides technological advancement, Indian agriculture badly needs some drastic institutional and organisational changes, which are not happening because the agriculture lobby is politically very strong and has a vested interest in its lack of progress. Indian agriculture is currently faced with many vices, which include absentee landlordism and subsistence farming coupled with land fragmentation. Third, small landholders (including landless farmers and agricultural workers) do not see any alternative employment available to them—for want of skills and also due to the overall industrial environment in the country in terms of employment generation.

Given this political economy, what is the way out of the present impasse? The Union and state governments should take a series of specific policy measures to increase agricultural productivity and manufacturing employment simultaneously. But results from such measures will take a longer time to take effect, I estimate. The fact is that huge political will is required for India to become a developed country (not poor, if at the same time not exactly rich) by 2020. Given the nature of our democratic set-up, this will be a risk, but there will be huge returns too—in economic terms as well as politically.

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Useful, but not really so

Published: Business Standard, March 23, 2007

By Pradeep S Mehta

The book “Competition Law Today: Concepts, Issues and the Law in Practice” Vinod Dhall (ed.) is a useful compendium of various dimensions of competition law, and can be a good reference to any reader who is looking for all of this in one place. Alas, most of the chapters are rehashed with a little tweaking. This has been honestly admitted to by some authors, though not by all. Writings on the dimensions of competition laws by these and many others are available in published papers, which can be easily obtained from the Internet and libraries. Also, most of the papers are on rich-country experiences with hardly anything from a developing country.

All the international organisations in the area of competition law—Unctad, the International Competition Network, CUTS, OECD, World Bank, ADB, etc—have done a huge amount of work on this subject in developing countries. Of these, Unctad leads in its work, and could have been an excellent source for useful material for the Indian readers, if that is the targeted audience.

Here I am reminded of a very recent candid comment by this newspaper’s economic commentator, T C A Srinivas-Raghavan, in his Okonomos column “Inflation and exchange rate management,” (March 16): “ … [M]ost of our policy-oriented economists tend to think that what works in the west is exactly the same (as) ... in India. The ‘stages of development’ problem completely escapes them. Second, because of this aping, Indian economic research is sadly lacking in microeconomic strength. It is mostly what is called hawa mein baten (talking in the air).”

Vinod Dhall is no policy-oriented economist, but a generalist, a retired civil servant. Admittedly, the efforts made by him in learning about competition law over the last two plus years have been good, and thus this effort is a step forward. The overview written by him reflects his learning and is a good piece. Alas, he does commit a few mistakes, one by stating that the US was the first country in the world to adopt a competition law in 1890 through the Sherman Act. In fact, Canada was the first country in the world to adopt a competition law in 1889: The Act for the Prevention and Suppression of Combinations in Restraint of Trade. The triggers for both the North American laws were the exploitation of agrarian interests by monopsonistic farm goods traders.

One part of the book deals with competition laws in various developed country jurisdictions, save South Africa and Mexico, which don’t really count for much in India, and is part of the continuing tragedy of relying upon jurisdictions where the political economy is quite different. Rather, some substance on developing country jurisdictions would have helped the reader. These could have included some regulatory failures as well, such as in Thailand, when similar conditions prevail in India. There is a huge amount of literature in the realm, and it would not have been difficult at all for the editor to have delved into them or asked researchers from such developing countries to write them.

I speed-read through the whole book to see if there was anything which might help the Indian regime, but did not find anything. In fact, one chapter on the “abuse of dominance”, which is going to be a big thing in India due to the thrust of the new law, did contain a reference to developing countries in the title, but a close look exhibited no analysis of a likely situation in India, neither did it contain any prescriptions for India or even other developing countries. It is otherwise a good essay.

If it is part of the advocacy agenda of the Competition Commission of India (CCI) to educate Indians, it is quite disappointing. As stated before, all the knowledge is available in various texts, and thus nothing new has been contributed to the rich literature on competition law. The CCI personnel have also worked behind the scenes, while two of them have contributed a chapter each. But these two chapters have not carried any analysis. If the authors felt hamstrung about being critical, the editor could have asked other Indian scholars to write and thus do justice. What the CCI has not been able to do for the last two plus years of its advocacy phase is to publish reader-friendly pamphlets or even a newsletter which could have helped educate Indians and themselves.

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When politics trumps economics

Published: Business Line, March 22, 2007

By Pradeep S Mehta & Manish Agarwal

Since economic liberalisation started, there have been considerable policy changes in many developing nations, with increased reliance on market forces. Several transitional economies adopted competition laws as a follow up to market-oriented reforms. Additionally, many opened up for private players sectors until then reserved for the public sector. This focus on competition and regulatory laws in developing economies reflects the substantial changes happening in their governance system.

What implication has this new form of economic governance had for the developmental objectives in various countries? The answer is patchy. China, for instance, approved a competition law in June 2006, almost 30 years after it began economic reforms, yet the country has moved rapidly from low- to middle-income status. Neither of the two major growth stories, Botswana or Mauritius, had a formal competition law until the latter passed its Competition Act in April 2003.

`Political will' turns out to be the key factor that determines the effective implementation of competition laws. In Malawi, though the government claimed to support competition, it took the country eight years to establish the Competition Commission! In Bangladesh, the Monopolies and Restrictive Trade Practices Ordinance remains only in the statute book

In Zambia, the political will to get rid of the financially-drained state-owned enterprises overshadowed other economic priorities. Though the Competition and Fair Trading Act was passed in May 1994 following donor insistence, the competition authority itself was operationalised only in May 1997.

Regulatory strength

The political will to create a strong regulatory agency from the outset is crucial as only a strong regulator can balance the demands of various interest groups, among other challenges. Unfortunately, in most cases, the state may try to further its interests by creating a weak regulator, over which it can exert control.

Since regulatory reforms are largely concentrated in public utilities, where there is a strong public interest factor, it is difficult to envisage how regulatory reforms would be insulated from overriding political considerations.

In South Africa, competition law puts public interest objectives alongside efficiency objectives, raising the profile of these imperatives, which seek to ensure coherence across diverse policy areas. Nonetheless, governance challenges are likely to arise when competition authorities assess non-competition criteria without transparent processes for doing so. In such cases, administrative discretion in interpreting concepts such as `fair' competition is often the starting point for corruption in developing countries.

A democratic set-up requires politicians to win elections to hold policy-making positions. They must satisfy the aspirations of their electorate, to whom they have to go back, at intervals, to seek a fresh mandate. Politicians often stall the implementation of competition principles for fear of losing certain powers, which they use to satisfy vested interests.

However, little effort has been made to identify the potential gains for politicians from promoting competition measures, including how it can help them retain/enhance their public image/support-base.

Implementation of competition and regulatory laws also faces other roadblocks. Civil servants consider competition/ regulatory law an attempt to reduce their prerogatives. Moreover, the bureaucracy tends to perpetuate itself in regulatory roles for which it may not have the acumen. Businesses generally oppose competition regimes as they feel that it would reduce their market share and profits. Hence, adoption and implementation of a competition regime may easily be hijacked by powerful vested interests.

Other Obstacles

Competition law may covertly protect politically well-connected companies from `fair' competitive forces, guaranteeing monopoly rents and killing innovation. A government committed to competition law, and the regulator enforcing it must not only direct advocacy efforts towards consumers, but also towards the influential industry participants.

In most developing countries, competition and regulatory laws are entirely new concepts, often being adopted under external pressure (for instance, in Zambia). Consequently, few officials in the public service appear to have understood what the new regime means and what it takes to have a well functioning regulator.

While the cornerstone of the current development paradigm is a private-sector-led growth strategy, implementing economic reforms in developing countries is challenging because of the disregard for the rule of law, weak judicial institutions, and ineffective commercial codes and bankruptcy laws.

A host of political, economic and governance constraints frustrate the implementation of regulatory laws in developing countries. Despite this, most developing countries have gone beyond contemplating whether they want a competition or regulatory law or not, and are debating how to structure their laws and how best to implement an effective enforcement regime within the constraints.

This article can also be viewed at URL:
http://www.thehindubusinessline.com/2007/03/22/stories/2007032200530800.htm

PSUs can`t be more equal than others

Published: Business Standard, March 19, 2007

By Pradeep S Mehta

India needs $70bn of private investment in infrastructure and will not get it without a level playing field.

One anachronism which the telecom regulator TRAI is taking another bash at is the issue of access deficit charge (ADC) being levied on private sector telecom operators to supposedly subsidise the state player BSNL for its un-remunerative operations. This is over and above the Universal Service Obligation fund for servicing rural areas, towards which private telecom operators also contribute 5 per cent of their total revenues. Insofar as the ADC is concerned, it disappears in the account books of BSNL, thus one doesn’t know how it is being utilised. Ultimately, it is the consumer and the economy which bear the burden of these irrational charges through higher tariffs and associated inefficiencies. More importantly, in the larger context, the state sacrifices the principle of competitive neutrality, which is so essential to attracting the huge private investment required over the 11th Plan period.

We have a mixed economy and it is imperative to maintain it for the infrastructure sector over the 11th Plan period and beyond, which is so crucial to help the whole process of economic growth. Of the estimated $350 billion required for building our infrastructure, based upon World Bank’s data, approximately 20 per cent or $70 billion (or even more) is expected from private sources, foreign and domestic, while the rest has to come from the state and international development institutions. For that to happen smoothly, we need independent regulation so that investors get a predictable and stable environment. Equally vital, we also need to promote sound competition principles to not only attract investment but also ensure that people do not lose out to monopolistic and other anticompetitive practices.

One sound competition principle is that of ‘competitive neutrality’, that is, providing a level playing field in particular to private investors vis-à-vis the state enterprises. That is at a premium in India and some other developing countries.

The ADC feature in the telecom sector is one which is not explicitly ‘competitive neutral’. On the other hand, there are implicit discriminatory practices existing due to a variety of factors. Furthermore, the ministry itself is softer to state companies than it would be in its dealings with private investors. This is because the state owned companies and the regulator in any sector report to the same ministry. What is required is that all state enterprises be under a standalone ministry, rather than under line ministries, as in South Africa.

A recent example of explicit discrimination is worth mentioning here. The Insurance Regulatory and Development Authority’s recommendation to the finance ministry to do away with sovereign guarantee for LIC was turned down. LIC thus has a huge marketing advantage over private players who have come in recently. Other than this, even today, LIC is the dominant player in the life insurance sector having had a long stay, a huge network of over 2,500 offices and thousands of agents in the country.

Pursuant to a sound research-based advocacy by CUTS, the government is now in the process of adopting a national competition policy which includes competitive neutrality as one of the principles to be followed by the state to ensure that competition prevails and a level playing field is created. It is a fallacy to believe that extra favours are required by state companies to be able to compete effectively in the market place. In fact, the reverse is true — when state companies have to compete at par, they improve their bottomlines considerably.

Indian Airlines is a case in point. It turned the corner soon after the opening of the sector to private players. Not only that, it also stopped treating its customers like doormats. However, both Indian Airlines and Air India paradoxically offer an exactly opposite example of reverse competitive neutrality. Over many years, neither airline was allowed by the government to upgrade its fleet, due to several specious reasons. On the other hand, new private sector players like Jet and Sahara could acquire new aircraft and grab a market share which is today bigger than Indian Airlines’.

In fact, competitive neutrality is enshrined in the Constitution of India under two different articles on fundamental rights. Article 14 provides for equality before the law or the equal protection of laws to every person. This means that among equals, the law should be equal and that like should be treated alike. The maxim: ‘Equal treatment of unequals is as bad as unequal treatment of equals’, has been echoed in various apex court judgements when disposing off matters relating to discrimination. It is thus inferred that providing positive discrimination to state incumbents is tantamount to unequal treatment of equals, or prevents aspirants to become equals.

More importantly, the other article 19(1)(g) enshrining the ‘freedom to practice any profession, or to carry on any occupation, trade or business’ is also relevant to the issue at hand. However, the same article allows reasonable restrictions in the interest of the general public, or the so called ‘public interest’ clause, under which the state has the right to provide positive discrimination to a deserving class of persons/entities. The issue here is what are ‘reasonable restrictions’ and what is ‘public interest’. These windows have often been misused and abused through state arbitrariness (read whims and influence), or to accommodate political economy considerations rather than efficiency, and to favour state enterprises.

One can however argue that there could be situations where positive discrimination is required to satisfy public interest goals. But, that has to be done transparently and equitably, rather than arbitrarily.

In conclusion, some may argue that in spite of the lack of competitive neutrality, private players continue to invest merrily, like in the telecom sector, and it is therefore not a problem. However, what prevents investors to shy away from investing in other sectors if they do not get a level playing field? Then our ambitions to raise private capital would not materialise to the extent as we would like to. Our infrastructural investments will suffer, thus affecting the entire economy and the desired growth rate of over 9 per cent to create more jobs. That would be bad for both the people and the economy, and truly not in the public interest.

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Where in the world are the watchdogs?
Jobs of such critical public concern should be thrown open to all

Published: Financial Express, March 17, 2007

By Pradeep S Mehta

At a recent finance ministry and CII meeting on infrastructure financing, Arun Nanda of Mahindra & Mahindra offered himself for appointment as a regulator, even if the salary was far lower than what he gets. He was responding to the finance minister’s observation that on such low salaries, they cannot attract good people from the private sector, and thus end up appointing retired civil servants. Nanda buttressed his offer with the condition that the regulator must be truly empowered, and that many in the private sector, having already accumulated substantial wealth, will be willing to work at low remuneration. His offer was dismissed with a business-as-usual remark—that sometimes regulators become a little too independent.

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