Thursday, March 23, 2023
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India must revisit its 2011 Competition Policy draft. EU, Australia, and Japan are ahead

A holistic National Competition Policy has the potential to aid efforts in removing entry barriers restricting the participation of MSMEs.

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The Indian competition regulation experience has been truly unique. While competition law in India has been on the statute for more than 50 years with the introduction of the Monopolies and Restrictive Trade Practices (MRTP) Act in 1969, efforts to introduce a competition policy have not been fructified. Competition policy has a broader set of objectives to achieve competitiveness in the economy through the instrumentality of laws, policies, and programmes in all the areas of economic activities.

Competition law is a subset of competition policy. Mature antitrust jurisdictions like the European Union, Australia, and Japan have constantly refined their competition policies to keep up with the growing and rapidly changing economy. India’s Ministry of Corporate Affairs floated a draft National Competition Policy in 2011; it has still not seen the light of the day. The Competition Law Review Committee Report of 2019, which reviewed the Competition Act of 2002, also recognised the importance of such a policy but failed to formulate any roadmap for its implementation.

Resonating with this year’s World Competition Day theme of ‘Competition Policy for an Inclusive and Resilient Economy’, we should strive towards actualising a holistic National Competition Policy (NCP) for India. It is all the more important for India’s post-Covid recovery, particularly with a focus on Micro, Small and Medium Enterprises (MSMEs). NCP has the potential to aid other government efforts in this direction by removing entry barriers restricting the participation of MSMEs. This, in turn, would help in countering the rising unemployment rate in India.

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Need for an NCP

Competition policy is an overarching framework for enhancing competitiveness across market sectors. Competition law enforcement through cartel-busting, penalising monopolies, and doing merger control is ex-post. Competition policy can promote market competition ex-ante as well. Often, sector-specific regulations inadvertently cause distortions, creating barriers to entry for new and small entrants. As sectoral policies and laws are not designed from the lens of competition, they might cause latent ill-effects on competition in a market sector. For instance, Nestle’s brand ‘Cerelac’, which produces instant cereal and formula for infants, has an undisputed monopoly in the Indian market with more than 90 per cent market share. This market concentration might be a direct result of a ban on any form of advertising of infant food or milk substitutes imposed by the 1992 Infant Milk Substitutes and Foods Act. Although this ban was put in place with an objective to prevent the consumers from perceiving it as a substitute for breastfeeding, the unintentional consequence was market concentration.

Establishing a product without any advertisement is a high entry barrier for smaller players and thus, an incumbent firm with established goodwill sweeps the market. As the product already carries a disclaimer that it is not a substitute for breastfeeding, increased consumer awareness efforts instead of a ban on advertisement could have possibly met the objective while keeping the market competitive. This demonstrates that sectoral laws can unintentionally reduce market access and raise prices. Competition law has a provision for carrying out competition assessment of legislations to identify any regulatory barriers to entry and suggest amendments to the sector; however, in the absence of an NCP, such assessment is not regular and focused, nor carried out for new legislations at the time of their formulation.

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Revival of the economy

Implementation of an all-inclusive competition policy is even more significant now for the revival of the economy reeling under the pandemic-induced recession. The government’s focus is on MSMEs as a major contributor to India’s GDP (its share of Gross Value Added to GDP in 2018-19 was about 30 per cent). It also accounts for 40 per cent of exports.

The Covid-lockdown wreaked havoc in the Indian MSME landscape for a multitude of reasons. An average decline of 46 per cent in 2020 and 11 per cent in 2021 was observed in the volume of business conducted by MSMEs. The annual report of the Ministry of MSMEs has also recognised limited access to market, technology, finance, and talent as major roadblocks in the growth of an MSME. While central and state governments have launched several schemes to recharge the sector, competition policy is required to aid their efforts. When entry barriers are lowered, MSMEs would be able to easily enter the concentrated markets and innovate thereby boosting competitive rivalry.

Less concentrated markets also ensure inclusive growth. Job creation is the top priority for the government at present as the unemployment rate has risen from 9.1 per cent to 9.4 per cent between January-March 2020 and 2021. MSME is the second-largest employer in India and therefore carries the potential to absorb the unemployed population. Supreme Court in the case of Competition Commission of India (CCI) v. Bharti Airtel Ltd. and Ors. (2018) also pointed out that an NCP can positively impact employment policies as it provides a bridge for the entry of new efficient competitors. Focused efforts are required to dilute entry barriers and thereby invigorate small businesses and employment opportunities too.

Further, digital market regulations are in the making and as digital markets are more prone to concentration, swift implementation of NCP is important to ensure the involvement of the competition authority in the making of these legislations. The 2011 draft of NCP is a good starting point. The policy draft, however, looks to establish an NCP Council that would be responsible for overseeing and coordinating the implementation of the policy. In this respect, the government must ensure that the mandates of the NCP council are not overlapping or conflicting with the functions of the CCI.

Dr Arvind Mayaram is former Union finance secretary and chairman, Garima Sodhi is Senior Policy Analyst, and Bhaavi Agrawal is a Research Associate at the CUTS Institute for Regulation & Competition. Views are personal.

(Edited by Srinjoy Dey)

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