Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Curb inflation through competition reforms

There is enough empirical evidence that higher product market competition can reduce inflation over time

Arun Jaitley, holding charge of both finance and corporate affairs ministries, is no stranger to the fact that effective competition reforms can curb inflation and catalyse growth. One way to escalate competition is by adopting and effectively implementing the draft national competition policy (NCP). This can usher in the second big wave of economic reforms.

Competition reforms can help growth, improve governance and check unnatural inflation, at least in the medium term. Unnatural inflation mostly occurs when there are supply side constraints, which the Reserve Bank of India has also flagged. These constraints are due to various reasons, including entry barriers or lack of enforcement. Incumbents create artificial entry barriers to curb competition, which goes hand in hand with governance deficit.

Oligopolists use their power to get anti-dumping safeguards and actions against cheaper imports. Could different suppliers from different countries effectively cartelize? There was the case of an international potash cartel, which did not attract anti-dumping action because India does not produce any potash. It was estimated by Consumer Unity and Trust Society (CUTS) in 2012 that while India would import an average of 6 million tonnes of potash a year during 2011-2020, a significant overcharge would mean paying up subsidies to the extent of 68,400 crore. The government’s fertilizer department has stated that the subsidy of 3,021 per tonne in 2002-03 has gone up by more than four times to 14,400 on account of the continuing high prices, which is more than a drop in our fiscal deficit. Fortuitously, the cartel broke up due to internal issues and we are now able to get cheaper prices. But one never knows.

Recent experience of inflation in India has exhibited a well-established trend—it is higher in those sectors where demand is growing without matching increase in supply. Inflation forecasting is a tricky business as explained by pundits and demand-supply mismatch is not a new thing in India. Many of our econocrats are too busy in managing aggregate demand, including tweaking the interest rates, whereas a better response lies in the fact that supply creates its own demand.

Empirical evidence has established a negative relation between inflation and growth. Too high an inflation is certainly harmful for a country’s growth. We cannot afford to lower our growth ambitions as that will cut revenues for the government and concomitant negative impact on government spending. In fact, the common people understand that curbing inflation is the best protection against poverty.

Over the last few years, several measures have been spoken about to regulate inflation, but action was tragically missing, which is why the policy paralysis. For example, the working group on consumer affairs in March 2011, led by then Gujarat chief minister Narendra Modi, submitted 20 recommendations and 64 action points. It included various supply side issues identified under the NCP, such as Agricultural Produce Market Committee reforms, unbundling of Food Corporation of India operations in procurement, storage and distribution, policy coordination within and among Union and State governments, etc. All these suggestions are part of the NCP rubric.

Not only food, but reforms are required across the board to create a culture of competition in our country. At present, it is largely missing. Competition reforms and existence of an effective competition regime can help growth and curb inflation. More and effective competition can generate new innovations which is a major driver of economic growth.

There is enough empirical evidence that higher product market competition can reduce inflation over time. Competition can increase supply—more choice for consumers at affordable and fair prices.

Pradeep S. Mehta is the secretary general of CUTS International.

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