State of Competition in India

1. State of Competition in India Presentation made to the Planning Commission Working Group on Competition Policy Pradeep S Mehta Secretary General, CUTS International sg-cuts@cuts.org; psm@cuts.org www.cuts-international.org 28 July 2006

2. Background • Market-oriented economic reforms undertaken to stimulate competition and efficiency • Competition Commission of India and Sector Regulators established to ensure competitive outcomes • Govt of India making ‘competition’ a serious policy issue • State of Competition in India …???

3. Some Basic Concepts • Competition and its benefits • Competition vs. Competitiveness • Distinct concepts • Competition and Regulation • Two sides of the same coin

4. Competition Policy vis-a-vis Competition Law Competition Policy Trade Policy Industrial Policy All Government Policies that affect the functioning of markets Disinvestment Policy FDI Policy Fiscal Policy Competition Law IPR Policy Labour Policy Competition Policy – a broad concept that seeks to harmonise all government policies … others …

5. Competition in Competitive Sectors: Agriculture Markets • Markets less competitive where agro-commercials firms deal with consumers and producers • Huge gap between prices consumers pay and prices farmers actually receive • Intermediaries do not always behave in a competitive manner • Agricultural markets brought under Agricultural Produce Market Regulation Act to safeguard interest of producers and raise standard of local markets • But, Regulated markets still not competitive

6. Competition in Competitive Sectors: Agriculture Markets • Evidence of collusion in purchase of basmati paddy/rice from producers (Panipat, Haryana) • Grants marketing monopoly to state • Restricts farmer from entering into direct contract • Model Act prepared by Central Government • Allows for contract farming, direct marketing, establishment of agricultural markets in private and cooperative sectors • Alternative marketing avenues through cooperative marketing agencies, government agencies provide better prices to farmers

7. Competition in Competitive Sectors: Manufacturing • Post-reforms, market concentration increased in certain industries • Emergence of one or two dominant firms • Polyester Staple Fibre (Reliance: 54%, world’s 5th largest producer of PSF) • Viscose Staple Fibre (Grasim: 91%, world’s largest plant for producing VSF) • Storage Batteries (Exide Batteries: 62%) • Complaints of excessive pricing (e.g. Indian Cotton Mills’ Federation, in case of Reliance in PSF) • Impact analysis required to assess market behaviour

8. Competition in Competitive Sectors: Cement • Market fragmented; few players dominate each of the fragmented market • Cement industry known to be prone to cartelisation worldwide • Accused of price rigging in the past; MRTPC initiated inquiry; Builders’ Association of India boycott targeting Grasim and GACL • Government (major consumer with 30% consumption) – Bid Rigging? • Bid offers can give important clues • Is there patterns of systematic rotation of winning bids? • Is the share of companies in overall procurement stable?

9. Competition in Competitive Sectors: Steel • Highly heterogeneous and fragmented industry Hot Rolled Coils: • Single largest steel product traded • Allegations of differential pricing between intermediate and end product • Allegations of cartelisation • Regulatory Authority? • Instead required enabling government policies and active role by competition agency

10. Competition in Competitive Sectors: Pharmaceuticals • Consumption patterns not affected by prices; Doctors and pharmacists – decision makers • Collusive behaviour of pharmacies • Central Government making efforts to curb trade margins • NCMP promises to "take all steps to ensure availability of life-saving drugs at reasonable prices" • Supreme Court order in K.S. Gopinath case, March 10, 2003, directing government to ensure that “… essential and life-saving drugs do not fall out of price control"  • Regulatory regime - hard on manufacturers but soft on doctors and pharmacists

11. Competition in New Economy Areas: Information Technology • India still to emerge as major user of ICT • Hardware segment: • Strong competition between Indian brands, foreign firms, and non-branded sector • Software segment: • Microsoft operating system controls over 90 percent of desktop software market • Lack of competition sets limits on development of application software based on this operating system • Open source software can make software segment competitive • Enabling Government policy to promote use of open source software, particularly in e-governance projects

12. Competition in Regulated Sectors: Energy • Market structure for coal production and distribution completely dominated by State owned entities • Distribution of coal managed or mediated through government agencies • Petroleum products: Lack of transparency in pricing • Power sector, poor regulatory environment due to government’s continuous interference • intra-state transmission and distribution still a monopoly • Government still dominates most of primary as well as secondary energy sectors

13. Competition in Regulated Sectors: Transportation Freight Transport • Seaports • Intra-port and inter-port competition, not adequate • Port Trusts as owners and service providers, possibility of discrimination against competing service providers • TAMP not given adequate mandate • Container movement by rail • Requires neutral regulatory regime to ensure access to essential facilities • Cartelisation of cargo operators; cartelised operation of truckers’ union

14. Competition in Regulated Sectors: Transportation Passenger Transport • State-owned transport corporations given monopoly on profitable routes, particularly inter-state • Volvo fare: Rs.250 for Delhi-Vijaywada (intra-state; distance 276 kms and route served by private operators also) • Volvo fare: Rs.450 Delhi-Jaipur (inter-state; distance 252 kms and exclusively reserved for state transport corporation) • Route dispersal guidelines in civil aviation discriminates against state-owned carrier; Public sector airlines subject to procedural bottlenecks • Transport sector remains inefficient due to policies that inhibit competition and their poor regulation

15. Competition in Regulated Sectors: Telecommunication • Significant private sector participation after liberalisation and establishment of a regulatory body • Substantial growth and dramatic expansion in range of services available, as well as fall in tariffs • Interconnection in telecom – still unresolved • Access Deficit Charge to BSNL: lack of transparency • BSNL cross-subsidising competitive ISP business with the less competitive dialup business • Intervention in regulatory functioning

16. Central Government Policies and Competition • Thrust of reforms to allow for more competition and for the government to play the role of a facilitator rather than the controller of economic activity • Several policies and practices of the government distort the market process and competition • Examples emerging from sectoral slides • Trade Policy: anti-competitive dimension exists (e.g. anti-dumping measures, inverted duty structures) • Labour Policy: exit difficult; inspection regime constitutes a significant barrier to entry and operations

17. Central Government Policies and Competition • Government Procurement • Purchase preference to public enterprises • Procurement rules result in anti-competitive outcomes (e.g. procurement of concrete sleepers by Railways) • Price Regulation • Intervention in pricing of commodities (foodgrains, coal, oil) • Rules and Regulations • Clearances required for setting up business and time involved • Essential Commodities Act: discretionary power to officials and leads to excessive control and intervention

18. Conclusions • Generally, policies framed and implemented without acknowledging the market process • Government should evolve a system of ‘competition audit’ • Government policies should have an explicit statement about the likely impact on competition • Adopt a National Competition Policy to provide guidelines at all levels of government in maintaining appropriate competition dimension