Competition law must apply to PSUs. Coal India case is a good start

While there may be welfare motivations for subsidising bus travel or fertilisers, it hurts private players whose goods and services compete in the same market.

representational image: It is useful to ask how state-owned enterprises such as CIL interact with private players, and the impact they may have on markets.

In a recent judgment, the Supreme Court held that the Competition Act applies to Coal India Limited regardless of its status as a public sector undertaking. This is quite a remarkable outcome and should lead to a debate on the differential treatment of PSUs in various spheres of the economy. A competitive market is the bedrock of a modern economy. A lot of attention is paid to the excesses of private firms. But equal thought must be given to monopolies that are created by government diktat, or state-owned firms, which compete with the private sector.

The CIL ruling

Coal India Limited (CIL) is a public sector monopoly. It was accused of abusing its dominant position in the production and delivery of non-coking coal to thermal producers. The Public Sector Undertaking (PSU) objected to this, saying that because it operated coal mines under the Coal Mines (Nationalisation) Act 1973, the Competition Act should not apply. Their argument was that the very process of nationalisation gives ownership and control of the coal mines to the State, so that a scarce resource can be distributed to serve the common good. This implies that CIL does not operate in the commercial sphere. The Competition Commission of India (CCI) had among other arguments, relied on the findings of the Raghavan Committee, which had said that a State monopoly could not be allowed to operate in a state of inefficiency…State monopolies must fall in line and operate in the midst of forces of competition.  The Supreme Court has refused the CIL’s plea, and remanded the matter back to the CCI to decide the issue on merits. The applicability of competition law to Coal India is a step forward.

State-owned enterprises and the economy

It is useful to ask how state-owned enterprises interact with private players, and the impact they may have on markets. In many instances, these are monopolies, often because entry is restricted to private players. Take the example of railways, which is a monopoly because India does not allow private players to operate trains, at least in the area of passenger services. This may help to keep prices low for consumers, but it is often at the cost of the quality of service, and the pockets of the tax-payer. One could argue that provision of rail services should be considered as an economic activity regardless of who offers it, and principles of competition should apply.

State-owned enterprises also compete with the private sector in offering goods and services. Take the example of Air India, which until recently competed with private airlines, or the various public sector banks (PSBs) which compete with private lenders. While one may not observe a direct violation of competition law, these firms get preferential treatment from the government, and their presence can affect competitive market dynamics. As an example: considering the amount of losses that Air India incurred while it was government owned, it affected the prices and profitability of private airlines. Tax-payer money was used to prop up a zombie firm, that had adverse implications on the private firms.

In the example of public sector banks (PSBs), there is an implicit guarantee on the deposits kept in these banks. This is an unfair advantage relative to private ones who only get an insurance coverage from the Deposit Insurance and Credit Guarantee Corporation (DICGC) of Rs 5 lakh per account. In the event of a financial crisis, depositors flee private banks for “safety” of the public banks, potentially hurting the public banks, and leading to inefficient resource allocation overall. When the government continuously infuses capital to keep the PSBs from shutting down, it is using taxpayer money to prop up bad banks. Private banks, on the other hand, have to go through much more scrutiny when they ask for capital from their investors. In the listed firms space as well, rules are relaxed for public enterprises relative to private firms.

Governments often provide fiscal incentives to their entities, or subsidise access to their services. While there may be welfare related motivations for subsidising bus travel or the use of specific fertilisers, the subsidy hurts private players whose goods and services compete in the same market. Once again, such instances may not be a violation of competition law, yet they do impact the competitiveness of market participants.

The fundamental question to ask is if the government should be involved in the production of many of these goods and services. Welfare can be achieved through direct benefit transfers and does not necessarily require the government to act as a player itself. While state-owned enterprises continue to exist, adequate emphasis should be paid to the issue of competitive neutrality. The premise of competitive neutrality is that governments refrain from using its legislative or fiscal powers to advantage their own businesses over the private sector. This is a principle also outlined by the Organisation for Economic Co-operation and Development (OECD), which suggests that in a competitive neutral environment public and private enterprises should face the same set of rules, and the former should not get any advantage by virtue of their contact with the State.

Renuka Sane is research director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. Views are personal. She tweets @resanering

(Edited by Anurag Chaubey)