By Vikas Lalani
Fair Competition: The Engine of Economic Development Entrepreneurs’ only passion is to make money and service to the public is incidental. To live this passion, Competition provides them a fair level-playing field where they strive for the patronage of consumers. Competition in this context is a vital process by which Entrepreneurs are forced to become efficient, innovative and offer greater choice at competitive quality and price to the consumers. The most common immediate goal of promoting fair Competition has been ‘Economic Development’ by maximising economic efficiency and establishing consumer welfare. This includes protecting the process of Competition, free market access (by prevention and elimination of monopolies, monopolistic practices and other restrictions) for the efficient functioning of markets (Domestic or International) as a means of attaining economic efficiency in production and consumer welfare. We can state that the Economic Growth can be attained through the interplay of above immediate objectives; hence a casual relationship between Competition and Economic Development is posited. In this context, ‘Competition’ is an intermediate objective and ‘Economic Development’ is a final goal. Nexus between Economic Development and Competition Before coming to the nexus between Economic Development and Competition, we must sensitize the meaning of Development. Instead we should use the word ‘Sustainable Development’. Sustainable Development acquires an added meaning in the context of the growthversus-equity debate. But what do we mean by sustainable development? The Brundtland Commission defined it as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. As per recent research1, however, argues that the definition is too narrow. It makes no mention of human well-being and makes relatively weak demands on 1
National Bureau of Economic Research paper, Cambridge
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By Vikas Lalani
inter-generational justice. In its view, sustainable development requires that future generations have no less of the means to meet their needs than we do currently. Economic Development should be evaluated in terms of its contribution to intergenerational wellbeing. Inter-generational well-being would not decline over a specified time-period if and only if a comprehensive measure of the economy’s wealth were not to decline over the same period. The relationship between Competition and Economic Development is receiving increased attention in the light of globalization and its implications for Sustained Economic Growth and Consumer Welfare. When it comes to measure the relationship between Competition and Economic Growth can either be positive or negative. In the initial phase of Economic Development more Competition is beneficial to growth, since it allows a substantial better use of resources, without hampering that much innovation incentives. On the other hand, when market Competition is sufficiently tough, more Competition reduces drastically technological progress, improving only marginally the allocation of resources across economic activities. In this scenario, the profit incentive effect prevails over the resource allocation effect and the correlation between Competition and growth is negative. There should, therefore, be an optimal amount of Competition for promoting Economic Growth and Competition in excess of this would have negative effects on growth. Innovation, Competition and Economic Development It is generally conceivable to accept the notion that the nature of Competition prevailing in the market will have an impact on innovation. The fact that innovation has an influence on Economic Development is not a subject of debate. Hence, linking Competition to innovation implies that Competition will affect Economic Development.
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By Vikas Lalani
Generally, the expectation of some form of transient ex post market power is required for Entrepreneurs to have the incentive to invest in R&D. Similarly, it is the possession of ex ante market power that is more likely to favour innovation. The reason why market power (monopoly) can result in innovation is that Monopolies tend to charge higher prices and restrict output, in order to maximise their profits. These same profits can be used for innovation, which would resul result in a reduction in marginal costs and increase in output, over time. This is illustrated in Figure 1, showing the demand, marginal revenue and marginal cost curves for a monopoly. A shift in the marginal cost curve from MC1 to MC2, as a result of successful innovation, will result in an increase in output produced from Q1 to o Q2. Such decrease in marginal costs and increase in output, over time, may not be possible under a competitive environment. Inducing Competition can result in prosecution of companies for suppressing entry, through anti-competitive competitive behaviour may therefo therefore, re, reduce the incentive towards innovation and economic growth can be slowed down. This is a POSSIBLE channel through which Competition can reduce the economic growth rate. On the other hand, the link through innovation is also not one way. Competition will wi render price-increase increase and induce profit-making profit making unviable, as price increase will be equivalent to driving away buyer patronage to rivals. In such a scenario, Entrepreneurs need to be innovative, in order to reduce costs and produce more output at prevai prevailing ling market prices. It is through the introduction of Competition in the markets that Entrepreneurs will be compelled to re-invest re invest in new production technologies, new production processes and products. Entrepreneurs would strive for better incentives and tthere here would be a general reduction in slackness and inefficiencies.
By Vikas Lalani
The promotion of productive and dynamic efficiency will make enterprises achieve economies of scale, enhance international competitiveness and promote R&D capacities. Competition, therefore, stimulates increased efficiency in innovation, production and resource use, which, in turn, leads to enterprise development and increased aggregate welfare. India’s Economic Growth and Competition Our economic reforms of 1991 were aimed at unleashing the animal spirits of Indian Entrepreneurs and the wellsprings of Indian creativity. We have long since left behind the era of modest savings, low investments and low growth, India is now the world’s fastest growing economies. We are now increasingly part of the global economic currents. But we have also demonstrated our resilience to external economic shocks. We were among the best performing economies during the recent economic crisis. Our foreign exchange reserves are substantial. Our industry and services sectors have modernised and diversified in an unprecedented manner. We are emerging as a global centre for information technology, research, development and innovation. Our financial institutions and capital markets have become sophisticated and are capable of mobilising and allocating resources for our ambitious investment needs. India has gradually become one of the most preferred global destinations for foreign investors all over the world. While we should take pride in our successes, we are also conscious of the many challenges that persist. We still have to deal with the problems of mass poverty, hunger & disease and corruption. We need to bridge the enormous infrastructure deficit, the regional and the digital divide. We must ensure much greater penetration of quality and affordable social services. We have to create food and energy security for our teeming millions. We have to upgrade skills, and boost manufacturing in order to provide employment opportunities for our youth. In the aftermath of the global economic crisis, many developing economies, particularly India, have roared back to robust health, while Europe, America and Japan continue to stall. Lingering unemployment, weak demand in the United States
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By Vikas Lalani
and spiralling debt in Europe have further further fuelled perceptions that a weakened West is losing its vitality, just as India, China, Brazil and other emerging powers stride onto the international stage. The International Monetary Fund (IMF) predicted Indian Economy to grow by 8.75% compared with 2.25 2.25 percent for advanced economies in 2010-11. 11. The economy showed remarkable resilience and Gross Domestic Product (GDP) is estimated to have grown at 8.6 percent in 2010 2010-112 in real terms and fair Competition played a substantial and vital role in keeping aalive our growing economy and exploiting market size as strength in crisis scenario as well as post scenario. As we come to measuring Competitiveness, 12 Pillars3 are taken by the World Economic Forum in its National Competitiveness Ranking Analysis on the Global Competitiveness Index as measures among 139 economies, as demonstrated in Figure 2 below:
The Ranking of India for these 12 pillars, as shown in Figure 2, clearly reflect that India has to work deeply on the most of the pillars as it lagged far behind behind in rankings. However, India is the second largest country in terms of population, we have great 2
Union Budget 2011-12
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The Global Competitiveness Report 2010-11 11 by World Economic Forum. Overall ranking of India is 51st among 139 countries.
By Vikas Lalani
market size, where we scored 4th rank, to compete and grow as well as to emerge as a market leader globally, if we work on the other pillars viz. Infrastructure, Education (both primary and higher), Labour market efficiency and on technology readiness etc. India’s competitiveness is based on its large market size and good results in more complex areas including financial markets (17th), business sophistication (44th), and innovation (39th). On the other hand, India has failed to improve significantly on any of the basic drivers of its competitiveness. The macroeconomic environment continues to be characterized by persistent budget deficits, high public debt, and high inflation. Labour markets are also in need of greater efficiency and flexibility (92nd). Strength of India lies in its Entrepreneurs and Economic Liberalization has spawned a whole new breed of self-made Entrepreneurs who have been the heroes of India’s Growth story and are confident to be Global Market leaders. Role of Skewed Policies and Politics A spectrum of factors – including social, economic and political environment – dictate the choices for provisions of any policies and its enforcement design. Moreover, the priorities adopted by governments in terms of budgetary support, manpower availability and political support are key determinants of a policy making and its effectiveness on implementation. Every policy supporting the development process needs to be supported and compatible with other complementary pro-development policies that can bear particularly on Economic Development. But the real change will depend on how the government and regulators go about putting in place a consistent transparent policy regime where decisions are based on commerce and economics rather than politics. The sound policy outcomes are assured only when designing and implementation of the policies are not politicized, discriminatory or implemented on the basis of narrow goals of interest groups instead should only be directed towards Economic Development.
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By Vikas Lalani
Skewed policies geared towards the vote bank have consistently killed Competition, creating an uneven play for both public and private sectors resulting adverse impact on the Economic Development. Below are two latest paradigms to throw light on the view discussed above on role of skewed policies and politics respectively: Case 1 – Skewed Policy The coal ministry wants to take back 31 coal blocks allotted to companies for captive mining, which have been lying idle for more than three to four years. Instead, the government should overhaul the moth-eaten policy that governs the coal sector. Today, only state-owned giant Coal India Ltd. (CIL) and Neyveli Lignite (which mines lignite for power generation) are allowed to mine and sell coal in the market. Other companies, including large private players like Tata Steel, JSW, JSPL, Reliance Power and Hindalco and state-owned entity NTPC, are allotted coal mines, but for captive use. This means they can mine coal and use it to generate electricity or make steel, aluminium or cement. They, therefore, have no incentive to mine coal economically or in a sustainable way, or to research and invest in modern mining technologies. The second problem with granting mines for captive use is inefficient utilisation of an essential fuel. If a steelmaker, say, has access to coal assets that are disproportionately larger than its requirements, it will simply dig up what it needs and keep the rest underground, even when coal prices soar. It would be much better if companies with their own mines have the option of trading the coal as well as using it for their own needs. This will balance, through the price mechanism and trade, supply and demand for coal and lead to a market that is far more efficient than today’s. The government must refurbish its policy to create a functioning coal market and for this, of course, the government has to first scrap the Coal Nationalisation Act. Case 2 - Politics Impact The celebration over the largest FDI in country’s oil and gas sector- the Reliance Industries – BP deal- has started dying down. The RIL-BP deal could go a long way in changing perception for companies that are still testing waters. The Cairn Vedanta 7
By Vikas Lalani
deal too co-exists, where the investors are awaiting government decision for nine months now and still counting. Above are just two well known, latest & small examples of the skewed policy & politics and their adverse impact of politics on the Economic Development. There are numerous which persist in our economic environment affecting our Economic growth and Competition adversely. Although, the pace of fair Competition and resulting economic reforms will only be based on how we craft our policies and execute them towards our nation’s best economic interest rather than favouring narrow interest of small group person. Also it should not be aimed on curbing market dominance of Entrepreneurs already in the market, but rather employ a broad approach that keeps entry and exit barriers low. Watchdog of Competition (Competition Commission of India) India has responded to the current world wide trend of globalization by opening up its economy, removing controls and resorting to liberalisation. Also, incremental changes in supply and demand patterns worldwide have exploded into sudden and traumatic change - the creation of a true MASS MARKET. As a natural corollary of this, it was felt that the Indian market should be geared to face Competition from within the country and outside and Competition Laws were enacted by the Government. Competition Laws in India were triggered by Article 38 & 39 of the Constitution of India. The Clauses which forced India to enact such law [whether Monopolies and Restrictive Trade Practices, 1969 (MRTP Act) or Competition Act, 2002], are reproduced below: 438.
1(1) The State shall strive to promote the welfare of the people by securing and
protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of the national life. 2(2) The State shall, in particular, strive to minimise the inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only 4 The
Constitution of India
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By Vikas Lalani
amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations. 39. The State shall, in particular, direct its policy towards securing— (a) That ...........; (b) That the ownership and control of the material resources of the community are so distributed as best to subserve the common good; (c) That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment; The move we took by enacting Competition Act, 2002, by metamorphosing MRTP Act, 1969, was a move from Command and Control economy to an economy based more on free market principles which is in more justice to above clauses. This is due to the widespread trend towards liberalization of markets, greater emphasis upon consumer welfare, greater similarity in economic analyses and most vital the universal condemnation of collusive practices. The watchdog under the Act, namely, Competition Commission of India (CCI), is assigned the role of Competition advocate, acting pro-actively to bring about Government policies that lower barriers to entry, that promote deregulation and trade liberalisation and that promote Competition in the market place. The jurisdiction of CCI extends to the entire economy including sectors such as banking, capital markets, insurance, telecommunications, roads and ports that already have sector-specific regulatory agencies. The need of the hour is to focus on preventing abuse of dominance and fostering Competition in the market by eliminating anti-competitive practices in national and international trade which ultimately will lead to Economic Development and increased aggregate consumer welfare. Hence, the CCI has a lot to contribute in the Economic Development and Consumer Welfare in India and the Act has given such powers to CCI to do so.
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By Vikas Lalani
Conclusion The text in above paragraphs has largely demonstrated that there is generally expected to be a causal relationship between Competition and Economic Development. This two way relationship comes from the fact that while Competition may bring with it increased production levels, as output restriction tendencies by monopolies are removed and more companies enter the industry, Competition may also reduce incentives for innovations, as monopoly profits are the largest sources of innovation. The need here to put emphasise on promoting FAIR and HEALTHY market Competition, both domestic and foreign, is important in driving market efficiency and thus consumer welfare by ensuring the incentives to innovators. Going forward, the pace of sustainable
“A Successful Competitor, having urged to compete must not be turned upon when he wins”
and overall growth will depend on how fair Entrepreneurs are, in playing a fair Competition game and in a manner that helps to reduce social tensions and disparities.
There are many business opportunities in keeping a billion of our population well fed, healthy and educated. If we can provide them productive employment, we would have created one of the world’s largest consumer markets. The message is loud yet clear that a well planned exhaustive Competition policy fostering fair Competition in the market can be of great benefit to each and every segment of the Economy as Engine of Economic Development resulting only and only sky scraping Economic Development. Long way ahead, it’s not the end...........
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