Competitive neutrality is
a minimum condition for effective mixed markets, for which the government
needs to adopt and implement the National Competition Policy quickly
|
Since
reforms began in 1990s, the government deregulated sectors that were hitherto
the exclusive preserve of the public sector — such as airlines, telephones, insurance, banking and so on. In most cases,
however, the government did not privatise any of the state enterprises, but
made them face competition from the private sector. Such a policy then requires
healthy competition between private sector and public sector firms by providing
a level playing field. Alas, in many cases, the government adopts positive
discrimination for state enterprises, thus violating a competition policy
principle of competitive neutrality. In order for our economy to function well
without any distortions, the government has to be neutral. The proposed National Competition Policy calls for such a policy
response.
As
the Organisation for Economic Cooperation and Development defines it,
competitive neutrality is a principle in market competition, which implies that
no business entity is advantaged (or disadvantaged) solely because of its
ownership. This is a significant element of a country’s competition policy and
countries such as Australia, the UK, the US, among others have
consistently advocated for the importance of this principle. The draft National
Competition Policy in India lays down certain principles on which competition
policy be hinged and includes competitive neutrality as one. Unfortunately,
despite little debate on its significance in any market setting, evidence of
its violation continues. For example, while railway container operations
allowed private players to operate, the dice is always loaded against them
vis-a-vis the state-owned Container Corporation of India, or Concor. Or, the preferential
treatment granted to Air India with respect to the allocation of traffic rights
and access to government funding vide laws, regulations, and practices is an
example.
On the other
hand, Air India has also suffered from lack of competitive neutrality in the
past. For many years, public sector airlines, which included then Indian Airlines, were trying in vain to procure aircraft to
expand their fleet. As a result, many unused bilateral traffic rights have been
allocated to those private airlines that have been allowed to operate lucrative
domestic and international services. Instead of giving Air India permission to
buy aircraft, the ministry allowed Jet Airways to open international services
that operated only on commercial routes already serviced by Air India. Another
similar instance of reverse competitive neutrality was seen in the case of the
closure of the three vaccine manufacturing public sector units on questionable
grounds, followed by sole reliance on private players by the government, which
has now been revoked after much hullabaloo.
The
principle that the playing field should be levelled between state-owned
enterprises and private firms is also true in the reverse. It is not only about
potential disadvantages faced by the private sector when it competes against
state-owned enterprises – which is how it is commonly understood – but the
reverse as well. In an earlier article in Business Standard*, I have argued how
this happened. No prizes for guessing that the rent-seeking behaviour of
politicians and malleable babus allowed all this to transpire.
Despite
being an essential ingredient for a successful competition regime, India is
seeing several instances of distortion of this principle across its various
sectors. In the recent past, there have been many such cases.
Earlier
this month, the Association of Power Producers complained about the
discriminatory treatment against Coal India’s draft fuel supply
agreement ( FSA), which they allege
favours state-run companies. The draft grants the option of arbitration
regarding FSAs only to government companies among other one-sided clauses.
Similar
concerns arose in the energy sector where the private fuel retailers shut
outlets alleging a non-level playing field and a price differential of Rs 3-8 a
litre on petrol and Rs 15-20 a litre on diesel, compared to rates of public
sector competitors. The government has not ensured a level playing field since
it has invited investment by private players, and it has gone back on the
withdrawal of the administrative pricing mechanism. Another problem pertains to
the grant of subsidies being provided on oil products. Besides the harmful
effects of these subsidies on competition and the environment, these are only
available to public sector companies and not to private players.
Similarly,
the capital market regulator, Securities and Exchange Board of India ( Sebi), recently announced its
plans to amend its investment policy. It now parks its surplus funds in fixed
deposits of state-owned banks only, even if the returns offered by them are
lower than that of private banks by up to 10 basis points (0.1 per cent).
According to the recent decision, Sebi would prefer to deposit its surplus
funds with public sector banks, even if the rate of interest offered by them is
less than the returns offered by private sector banks. The recommendations,
which came from Sebi’s committee of executive directors, intend to scrap the
current pro-competitive policy that involves competitive bidding between both
public as well as private sector banks. The argument offered in favour of the
amendment adds insult to injury by saying that was being done “to ensure safety
of funds”. A similar directive was once issued by the Reserve Bank of India to
public sector companies that they should park their funds only in state-owned
banks.
Over
the past decade, there has been a rise in the number of mixed markets and with
it, an increasing need to have a level playing field for market players. There
may be several reasons for having a mixed market economy that acknowledges the
significant roles played by both private and public sectors. However, where
competitive differences do not reflect underlying differences in costs or
objectives, such as where regulations or taxes apply differently to private and
public sectors, there may be a risk that the market will not operate perfectly
owing to resources being used inefficiently. The application of competitive
neutrality and any deviation from these principles, therefore, should always be
subject to the condition that the benefits outweigh the associated costs. For
this to happen soon, the government needs to adopt the National Competition
Policy and implement it.
http://www.business-standard.com/india/news/pradeep-s-mehta-indias-uneven-playing-fields/495483/
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