Competition minimum programme

I have just had the privilege of attending the fifth annual conference on Indian economic development organised by the Stanford Centre for International Development at Stanford University in Palo Alto, California.

The conference, which is supported by luminaries of the Indian community in Silicon Valley, brings together scholars, academics and policymakers with an interest in Indian economic development.

The theme of the conference this year was "Completing Infrastructure Reform", but inevitably there was considerable interest in the recently announced Common Minimum Programme of the United Progressive Alliance government.

There were two broad strands of commentary on the CMP at the conference. One strand was critical of the content and internal coherence of the economic sections of the CMP.

The other dismissed the CMP as a political tract, necessary to provide cover to the disparate components of the UPA coalition, but unlikely to be of much practical significance in determining the actual policies of the new government.

My own view is that the CMP will be important in shaping the rhetoric within which policies are presented, and should be examined in that light.

For me, an important element of the CMP is its emphasis on the role of the government in stimulating competition. While this might seem obvious or trivial to some, I believe that this represents an important conceptual breakthrough, particularly for a government supported by the Left.

After all, classical Marxist-Leninist doctrine bewailed the wastes of competition when compared with the rationality of central planning.

By the same token, the essence of the liberalisation strategy introduced by the Congress government of 1991 was the need to increase competitive pressure in the economy through a variety of instruments, notably trade liberalisation and industrial de-licensing.

The CMP stresses the importance of competition at several places. Thus in the section on administrative reforms it is stated that, "all regulatory institutions will be strengthened to ensure that competition is free and fair", the section on the financial sector asserts that, "competition in the financial sector will be expanded", while the section on the public sector says that, "privatisation should increase competition, not decrease it", and goes on to affirm that the UPA government will not support the emergence of any monopoly that restricts competition.

As has been widely noted though, the CMP is also unabashed in its defence of the public sector, in such areas as infrastructure, the banking system and existing successful central PSUs.

Based on these statements, and on what we have seen over the past decade, we are in for an important and interesting debate on the governance of the public sector. Here, the discussion of infrastructure at the conference is pertinent. One of the papers presented dealt with the reform of the Indian telecom sector.

The analysis made it clear that the key to the recent growth in the telecom sector was the belated but ultimately successful attempt by the telecom regulator, the Telecommunications Regulatory Authority of India to exercise jurisdiction over the Department of Telecommunications, and its ward, BSNL.

This exercise of control only became possible because BSNL underestimated the power of cellular telephony to challenge its wireline monopoly till the new players had developed critical mass. Only after the neutrality of Trai (and its appellate authority) was established has the big private investment in telecom been made. This story broadly confirms analysis of the sector currently being undertaken for the NCAER by Ashok Desai.

Following the passage of the Electricity Act 2003, and its endorsement of the concept of open access, a similar test is brewing in the power sector, but without the assistance of technology to solve the "last mile" problem of reaching the ultimate consumer, and with the additional complexity of a sector regulated at both central and state levels.

In domestic aviation the story is more complicated, with private sector players effective in curbing the public sector incumbent in certain respects.

The underlying point can be stated quite simply: in important sectors where private investment is badly needed, it will not be forthcoming unless there is assurance of even-handed treatment of the new entrants vis-a-vis the public sector incumbent.

To achieve this will require the rapid maturation of a group of regulatory institutions, which are still in their institutional infancy. As was pointed out at the Stanford conference, the success of such institutions represents a delicate compromise between professional efficiency and political responsiveness.

In order to provide credibility for long-term investors, such institutions have to be insulated from the political process; in return for such powers, their decisions have to be subject to judicial review.

Their value, effectiveness and credibility depend crucially on a renunciation of power by the administrative ministries of the government of the day.

The likelihood of such renunciation diminishes in a coalition government where ministries are seen as individual fiefs rather than being governed by collective Cabinet responsibility.

As the BSNL example illustrates (there are others) such renunciation is particularly hard if the concerned ministry construes its role as defence of the interests of the public sector incumbent.

Even where the regulator is credible and well established, as is the case with the Reserve Bank of India, there are occasional difficulties in convincing private investors and operators that its actions are taken in the interests of the public interest as a whole, rather than just the publicly-owned bits of it, although the RBI has been alert to this conflict of roles for some time.

It is the difficulty of managing these tensions that leads inexorably toward privatisation as an efficient and essential part of the long-term solution; the issue of whether the enterprise concerned is profit-making or not is completely irrelevant.

If, nonetheless, privatisation is ruled out for the present, then regulation to promote competition becomes doubly important, difficult though this is to attain in the short run.

There are two additional arguments that can be made in support of such pro-competitive regulation. First (and despite the claims to the contrary of the public sector incumbents in these sectors) there can be little doubt that it is the poor and the unserved who are most harmed by anti-competitive behaviour and the regulations that support it.

The telecom story is ample proof of this, and is reinforced by other work that NCAER is doing on regulatory barriers to provision of rural infrastructure.

Second, in a world of free trade, national competitiveness (another of the purported goals of the UPA) depends critically on the availability of intermediate non-traded inputs, notably infrastructure and financial services, at competitive rates.

This importance is even greater if we insist on handicapping private industry (and thereby the unemployed) with restrictive labour legislation.

In conclusion, for a government leery of the rhetoric of globalisation, competition offers an attractive and robust alternative. Indeed, the further liberalisation of foreign trade that is so badly needed can also be correctly justified as part of this broad agenda.

While the journey will be long and difficult, it is the right one to embark on. Defence of the common man against monopolies of all kinds is surely a cause that members of the UPA coalition can agree on. As with the New Deal in the US in the 1930s, the strengthening of institutions to support this vision can become its moral purpose.

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