Competition begins at Home

India will soon submit its suggestion to the World Trade Organisation (WTO) for a competition policy encompassing trade-related matters. Yet India has no competition policy for internal purposes. Why ensure competition where foreigners are concerned, but not for ourselves?

Hypocrisy on competition is woven into our policy fabric. Some laws like the Consumer Protection Act try to promote competition to protect consumers. Yet several other Acts aim explicitly at reducing competition on the ground of public interest, which invariably means some vested interest. Overall, our laws are strongly anti-competition.

This is no accident. The whole Nehruvian framework of planning and licensing was fundamentally ant-competition. In a competitive structure, firms are free to enter and contest any area, and defeated rivals are supposed to exit . Socialists from Sidney Webb onwards criticised this as the “waste of capitalism”. They said rendering capital and labour idle through closure was wasteful and inefficient. Instead, Nehruvian socialism sought to estimate the demand for every product, licence exactly the required industrial capacity, and keep this alive through thick and thin rather than permit closure. No, free entry or exit, no free competition. The command economy was buttressed by a leading role, often monopolistic for the public sector.

Experience in India and the world over has exposed command systems as infinitely more wasteful than competitive ones, since they promote inefficiency and waste. Profits go to those who manipulate licences rather than raise productivity. Controls imposed in the holy name of socialism are used for kickbacks and patronage networks. Nursing sick units is a recipe for constantly pouring scarce funds into inefficient entities at the cost of efficient ones.

Besides, it is now quite clear that the supposed ” waste of capitalism” is not waste at all. In the United States, 800,000 firms close every year, but 900,000 new ones are created. Up to 2 per cent of the US workforce is sacked every month, yet long-term unemployment is among the lowest in the West. In such a system, liquidation is a way of constantly redeploying land, labour and capital from less productive units (which close down) to more productive ones (new units). Thus, a competitive system keeps improving efficiency and incomes, without rendering labour or capital idle.

In India, however, a multitude of laws restrict competition to, supposedly, protect jobs. The Industrial Disputes Act makes it virtually impossible to sack workers or close units. The Urban Land ceiling Act inhibits competition in using urban land, and prevents companies from selling surplus land freely to fund expansion. Liquidation under the Companies act is so slow that three companies have taken over 50 years to be liquidated.

These laws are supposed to serve the public interest by protecting jobs. But restricting exit automatically restricts entry too. The lack of exit raise potential cost and risks, and so leads to fewer investments and fewer new jobs, Thus laws supposed to protect labour actually exploit the masses to cosset the unionised labour aristocracy.

In the small-scale sector, entry and exit is free. The two censuses of small-scale industries (SSIs) in 1972-73 and 1987-88 show that despite massive exit (one-third of all small units have closed), employment has risen by 5.46 per cent annually, thrice as fast as population growth (1.9 per cent) and four times as fast as job growth in the organised manufacturing (1.4 per cent). So, contrary to socialist claims, the easy-exit sector creates by far the most jobs.

Several other rules/laws explicitly protect various vested interests, such as:

Reservation of industries for the public sector. Also price and purchase preference for public sector units from government departments. Even those who regard public investment as important today admit that it is difficult to defend a public sector monopoly. After 1991, the scope of government monopoly has been cut, yet remains massive. Laws prohibits or restrict private activity in coal, insurance, banks, petroleum, mining-the list is unending.

Exports and imports canalised through the public sector. This again has diminished after 1991, yet the state has preferential or monopoly rights in trade in petroleum, wheat and several other agricultural products.

The Jute Packaging Order forces fertiliser and cement companies to use jute rather than plastic sacks. So tens of millions of customers pay higher prices and suffer the greater leakage of materials from jute sacks. Supposedly, this is in the public interest. In fact, it simply represents the triumph of organised jute workers over unorganised customers.

Reservations of items for production by SSIs and handlooms. This anti-competitive policy helps only inefficient small-scale units (which have become a powerful lobby), and is irrelevant for efficient ones. The 1987-88 census of SSIs shows that small–scale employment has risen faster in unreserved areas than reserved ones. No other country has such reservation. Small units flourish the world over (including the US) because they are inherently superior in several areas (like brassware, garments or diamond polish in India). Reservation makes a difference only where small-scale production is inappropriate, raises prices, reduces quality, inhibits exports and technological improvement.

This is only an illustrative list of ant-competitive curbs, not a comprehensive one. To this must be added curbs on foreign investment, imports and exports. Now, it is perfectly respectable to curb foreign investment and imports in order to provide temporary protection to infant industries. But when you see how comprehensively we protect even the most ancient industries like textiles, it becomes evident that we want to protect all from infants to geriatrics. The aim is simply to increase the profits of producers at the expense of consumers. Large and old industries are protected no less than small infants.

In sum, our policies have consistently milked the customer to placate various organised lobbies. This being the case, can we really demand better behaviour from other countries or foreign companies under WTO? If we can bless anti-competitive behaviour to promote profits and jobs in domestic industries, how can we complain if multinationals seek to increase their jobs and profits? We may be hypocritical enough to believe in one set of rules for Indian players and another for foreigners, but this will not wash in WTO or anywhere else.

Nor should it, Let us first frame and explicit competition for India. This will mean reviewing and dismantling many rules. A competition policy for foreign players should be a small part of an overall competition policy.

What do you think?