4 min read.Updated: 26 Dec 2019, 09:59 PM ISTPradeep S. Mehta
A policy that ensures truly competitive markets could help India plug the gap between its targeted and projected growth, and thus help the economy reach $5 trillion by 2024-25
In 2018-19, the size of the Indian economy (at current prices) was $2.75 trillion. In 2019-20, it is expected to become $3.03 trillion, with a 5.5% real growth rate and 4.5% inflation. Taking the 2019-20 figure as a base, India needs to grow 11% annually for the next five years to reach its target of becoming a $5 trillion economy by 2024-25. If average inflation if 5%, the economy’s real annual growth rate would need to be 6%.
But with 5% annual real growth as a “new normal" for India (as argued by many economists), and 5% annual inflation (as indicated by the Reserve Bank of India’s Monetary Policy Committee), we will have 10% nominal growth. If we can maintain that over the next five years, in 2024-25, the size of India’s economy will be $4,872 billion, falling short of the $5 trillion target.
From where would that extra 1% real growth come? The answer: An effective competition policy. A review conducted by the National Productivity Commission in Australia in 2005 found that productivity and price changes in infrastructure sectors where competition reforms were implemented boosted Australia’s gross domestic product by 2.5%. Similarly, it was argued that competition policy had positive effects on total factor productivity growth in South Africa. A 10% reduction in mark-ups through competition reforms was estimated to increase productivity growth by 2.0-2.5% per year.
In a report (bit.ly/2PPGAhd) the Organisation for Economic Cooperation and Development has compiled all studies on the impact of competition policy on macroeconomic outcomes. In general, there appears to be a consensus that an effective competition policy can result in extra 2-3% growth. Competition policy also has a significant positive impact on growth and jobs, and important redistributive effects that benefit the poorest in society. Given India’s chaotic democracy, I am much more conservative; that’s why my estimate is 1% extra on account of an effective competition policy, as against the 2% extra argued by many scholars.
In the last few years, the negative effects of an absence of effective competition have gained prominence across the world. Thomas Philippon, in his recent book, The Great Reversal, has argued that many key problems of the American economy today are not due to the flaws of capitalism or inevitabilities of globalization, but due to a concentration of corporate power. By lobbying against competition, big firms drive profits higher while depressing wages and limiting opportunities for investment, innovation and growth. Closer home, Vijay Kelkar and Ajay Shah, in their seminal work, In Service Of The Republic, argued for more freedom and competition to push firms to cut costs, innovate and deliver the best bargains for customers. They highlighted the need for public policy to address market failures, reduce entry barriers and increase competition.
It looks like countries are paying attention. For instance, a few months ago, the Philippines announced the adoption of a national competition policy—a comprehensive framework that will steer regulations and administrative procedures to promote free and fair market competition. It will involve effective enforcement of the country’s competition legislation; enactment of pro-competitive government regulations; and internalization of the principle of competitive neutrality. This will force state-owned enterprises to compete on a level-playing-field with the private sector.
All government agencies will need to assess and remedy competition-related issues, including examining the possible conflicts of interest in states’ proprietary and regulatory roles, and determining whether state subsidies or interventions affect the investment environment. Such a whole-of-government approach is key to the effective implementation of a competition policy.
The Competition Law Review Committee of India has inter alia recommended an unprecedented governing board to supervise the Competition Commission of India in its enforcement function, and to push for a competition policy across various arms of the government, which is a welcome step. We await further action when the draft Competition (Amendment) Bill is placed in Parliament. The National Competition Policy of India should focus on promoting free and fair competition, ensuring a level-playing-field between the private and public sectors, enhancing consumer welfare and addressing policies and practices that distort competition. A draft policy languishing on the website of the ministry of corporate affairs since November 2011 (bit.ly/2LZaEpE), along with the Three-Year Action Agenda by the NITI Aayog, which recommended comprehensive competition policy reforms, could be a good start.
With a broad national competition policy in place, the design of other public policies and interventions would need to be consistent with healthy market outcomes such as market efficiency and enhanced consumer welfare. The government will be able to restrict competition only when it’s the only available means to satisfy public policy objectives, or when the benefits for consumers are shown to be greater than the costs, as transparently weighed. With such an approach, no force can stop us from becoming a $5 trillion economy by 2024-25.
Pradeep S. Mehta is secretary general of CUTS International
Amol Kulkarni of CUTS contributed to this article
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