Do We Need An Ump?

Competition, it seems, should begin at home. True to that maxim and the deadline promised by finance minister Yashwant Sinha in the Budget, the Committee on Competition Policy (CCP) submitted an exhaustive report last week but appended with it two supplementary notes, one dissent note, one comment of dissent and one letter from a small industry association. Much like the MNCs and domestic industry, there seems to be a complete divergence of views between the economist members of the committee and the bureaucrats on how to tackle competition.

Does that affect the credibility of the report, which has otherwise got rave reviews from industry associations like cii and ficci? Committee chairman S. - .S. Raghavan told Outlook from Chennai: "It's for the public and the government to judge the credibility of our report. We wanted to send the message that growth is good. Therefore, competition should be encouraged. However, while dominance can be allowed, its abuse should be checked. In a football match, there has to be place for a referee to allow free and fair play."

The most discordant and controversial note has been struck by member Sudhir Mulji, columnist and director of GE Shipping, who disagreed with the very raison d'etre of the panel. Says Mulji: "The proposals are wholly inappropriate for India at this juncture. We should be promoting freedom of the markets and we should even tolerate excesses. The release of what economists call 'animal spirits' among Indian businessmen is the first and most difficult task of our policymakers... I believe they should scrap all monopoly laws until we can see where the competitive spirit is harmful." Regrettably, Mulji realised all this too late in the day to resign from a committee whose terms of reference were to frame a competition policy and law.

Except for Mulji, however, there is general consensus on the need for a competition policy and law. The law is still being drafted by Pallavi Shroff, solicitor with Amarchand & Mangaldas & Suresh A. Shroff & Co and committee member, while on the contours of a competition policy and its prerequisites, the panel is in complete agreement. About 80 countries have competition laws, most of them framed after the US model, and several have taken five to seven years to complete the procedure. In India, such a law has become relevant in the light of the economic liberalisation, the failure of the Monopolies and Restrictive Trade Practices (mrtp) Act, and especially since from 2001, bound by wto norms, India will cease to have trade restrictions. As trade opens up completely and wider reforms foster global-level competition, consolidation and cooperation among companies, should there be a Competition Commission to look into whether there's fair play or should jungle law prevail? It is precisely in this area where the CCP report has raised a lot of heat and dust.

The CCP suggests that a Competition Commission of India (cci) be set up to implement the Indian Competition Act, which should replace the mrtp Act. The proposed cci will have powers of an advisory, advocatory, encouraging and adjudicatory nature, compared to the highly discretionary mrtp Commission. Secondly, two cci members would form the Mergers Commission (MC). All mergers either involving an entity with assets of above Rs 500 crore or with a group having assets of above Rs 2,000 crore will have to be prenotified to MC.

What does a committee member have to say about the MC? ncaer chairman Rakesh Mohan feels that "not only are we recommending the creation of a new powerful governmental authority but we are also vesting it with considerable discretionary powers," so that it's possible that the MC "starts coming in the way of Indian entrepreneurship rather than promoting competition". As a result, he argues for a) wide public debate of the recommendations for their effect to sink in as well as for possible refinement and b) "only an advocacy role for the cci for the first three years".

Is there a reason why economists' worries must be heard? No other except that by consistently refusing to let go of discretionary powers enjoyed for 40 years, to repeal laws that have long been rendered archaic and to privatise monolithic, inefficient architectures called public sector enterprises, bureaucrats have encouraged the belief that they have little understanding of the market economy whose very basis is competition. Hence, the fear of some more red tape when the very aim of reforms is to remove all of that.

Argues commission member S. Chakravarthy in defence: "All we are saying is that be cautious, don't be in too much of a rush to push the button. Especially in areas of public interest, we have to wait and see." Curiously, the example cited by Chakravarthy to buttress his point is that of sail, the losing public sector steel monolith which has already guzzled an investment of Rs 70,000 crore and employs 4 lakh people. If the competition policy were to make an allowance for sail, wouldn't it go against the very ground rules it seeks to enforce, those of fair play?

Says Bibek Debroy, director, Rajiv Gandhi Foundation: "The way the committee has differentiated between public and consumer interest is inexplicable. Also, while disputes relating to unfair trade practices have come under the scope of consumer interest and Consumer Protection Act, 1986, monopolistic and restrictive trade practices will come under the proposed cci. It's not clear what is the distinction between unfair and restrictive."

Even in terms of the MC, there seems to be a grey area. For merger scrutiny, assets have been chosen as criterion, while marketshare seems to be the obvious answer. Secondly, the prior notification proposal makes sense in the case of big mergers which take a long time to straighten out their cost and market implications but when the committee talks of the 90-day validity period, it seems to use prior notification to mean approval. That can spell trouble for most Indian mergers in the wings, Birla-at&t and Tata Cellular, Reliance's takeover of ipcl, Hindalco's proposed takeover of nalco or balco and even mean review of mergers that have already taken place, like Lafarge's purchase of tisco's cement division or Hindalco acquiring Indal. It's because of this that member and advocate Pesi Narielwala has penned a comment of dissent, signed also by Mohan and Mulji, seeking the withdrawal of the premerger notification.

The most interesting part of the report is its first half, where the preconditions for a competition policy are laid down. The CCP asks for a) no ssi reservation for products on ogl and phased withdrawal of reservation for other products, b) scrapping the Industries Development and Regulation Act, or severely limiting its scope, c) an exit policy, d) scrapping bifr, sica and ulcra, e) no curbs on foreign trade or domestic goods movement, f) complete divestment in psus and state monopolies, and g) completion of reforms. A highly laudable agenda but going by past experience, most of these reforms look very time-consuming. Says Debroy: "I don't think we should wait for the wto. In fact, our own internal law is a prerequisite to negotiating before the wto. The exit policy and other such preconditions are important but we don't need to wait for those to happen first."

Debroy could be right, because the desperate need for a competition law is for replacing the mrtp Act, an anachronism in the current economic reality. If one has to wait for a series of reforms, wouldn't it have made better sense for the government to allow the CCP more time to hammer out a reconciliation over the thorny issues?