UNDERSTANDING THE INTERFACE BETWEEN REGULATION AND COMPETITION – A Review of India

Posted on : May 11, 2020
Author : AGA Admin

---

The Indian Economy has experienced shifts post-independence and thus to limit the concentration of economic power and to safeguard the public interest,the MRTP Act was enacted in 1969 focussing on ‘STATE’ Regulation at large.It is interesting to note that post 1991, there was a paradigm shift brought in by thematurity of the economy and also neo-liberal policies shifting the role of State from being a ‘controller to a facilitator’ and introduced the regulatory lens in the country.This had various implications such as the need for financial efficiency, increasing viability and sustainability of projects and market competition as a whole as facilitating competition is one instrument for ‘overcoming market monopoly and asymmetriesin objectives or information’. “It is evident that competition generally promotes efficient allocation of resources and ultimately economic growth.[1]”Thus,Competition Act 2002 was enacted.India embarked on the journey of being a Regulatory State and in addition, Competition Commission of India was established in 2003.The United States, where anti-trust laws and birth of regulatory bodies took place in the early 20^th century can be considered as a comparison.

Regulation can be considered as aggregate efforts to control or steer the economy and as rightly stated by Scott, “any process or set of processes bywhich:

• norms are established,
• the behaviour of those subject to the norms monitored or fed back into the regime, and
• for which there are mechanisms for holding the behaviour of regulated actors within the acceptable limits of the regime(whether by enforcement action or by some other mechanism).[2]”

 

Thus, it is evident to note that regulation is designed to achieve certain publicly desired results, which if is left to the market, would lead to monopoly of power,market failure,windfall profits,predatory pricing, asymmetric information, rent seeking etc.

 

Regulation leads to correction of market failure and increases the community’s greatest welfare and is thus in the public interest and promotes competition by promoting a healthy market economy at large.Economic regulation can be justified as a remedy to market failure.For example, for markets to function efficiently all actors must be price takers.“When various forms of collusion or the existence of a natural monopoly allows firms to administer prices, policy can prohibit the troublesome forms of intercorporate relationships or establish rate-making.Through regulation,in short,policymakers can compensate for market failure,thus contributing to economic efficiency and public welfare. [3]” It can be noted that regulation promotes competition by correcting collusions, prohibiting monopoly and unfair practices,setting standards for fair competition,promoting interests of consumers,giving access to information,controlling entities, promoting innovation and limiting anti-competitive behaviour[4]at the retail level,with respect to relationships with other suppliers and by unbundling.

 

It is important to take into consideration ‘ex-ante regulations’ which‘seek to identify problems beforehand and shapes stakeholder’s behaviour and responses through regulatory intervention’ and ‘ex-post regulations’ which ‘pertain to competition issues in the context of a specific market economy.’

 

Thus,regulation and competition are two sides of the same coin. It can be stated that regulations are a pre-requisite to competition and vice versa as, if there is a market, then regulations will be produced and ultimately the buyers will benefit from the regulations amidst the competition. Hence, regulations should not be dominated by the regulated interests but focus on reflecting widersocial interests thus promoting competition.

 

 

THE RATIONALE RELATED TO REGULATION FOR COMPETITION

 

Regulation is aimed at ‘bringing in or controlling behaviour’ and this can be done by ‘imposing costs, setting standards and guidelines, monitoring ,proscribing undesirable activity etc.’ Thus, the rationale for regulatory intervention are as  follows:

 

 

• Market Failure :

“Economists use the term market failureto refer to a situation in which the market on its own fails to produce an efficient allocation of resources [5]”.It occurs in the cases of ‘public goods’, in case of ‘natural monopolies’or ‘asymmetric information’ and in the ‘presence of externalities’.

 

After the regulatory reforms were adopted in India, rising demand and fixed cost reducing technology transformed the telecom sector and it was no longer a monopoly .It is interesting to note that the recent trends after the AGR dues incident has changed the Telecom Sector and with time we will notice how the telecom sector unfolds with JIO being a dominant player, Vodafone Idea being hit hard and BSNL and Airtel being somewhere in the game but not very significantly seen.

 

Looking at the electricity sector, it is evident that it was a ‘bundled monopoly’ but we see that ‘unbundling’ has brought in the ‘introduction of competition’ in many of its   segments. The ‘Electricity Act was enacted in 2003’ and there are Central Electricity Regulatory Commissions and State Electricity Regulatory Commissions.

 

The water sector is an interesting case to investigate as there is no proper regulatory body at the centre and the Central Government is the Apex body.The Maharashtra Water Resources Regulatory Authority Act was enacted in 2005.‘The Maharashtra Water Resources Regulatory Authority (MWRRA)’ was set up as an independent regulatory authority to pioneer the water sector reforms in India.On similar Lines, the same model was adopted by states like Andhra Pradesh , Gujarat , Uttar Pradesh etc. but there has not been significant strides made in water conservation and management. Recently, in May 2019, the ‘Ministry of Jal Shakti’ was formed and it is evident that a substantial‘Independent Regulatory Authority’ is missing in this sector.

 

• To have ‘Anti-competitive practices’ under check :

“Firms may resort to anti-competitive practices such as price fixing, market sharing or abuse of dominant or monopoly power. Laws that empower officials to take action can help deter such practices. Regulation through a set of transparent, consistent, and non-discriminatory rules can create a competitive and dynamic environment in which market players can thrive. In its absence, anticompetitive practices and regulatory failures may not allow the market process to yield socially optimal outcomes.[6]”

 

• Promotion of ‘Public Interest’ :

Eminent ScholarsPaul L. Joskow and Roger G. Noll states that regulatory intervention occurs to protect the public interest.Ensuring fair access, non-discrimination, affirmative action, or any other matter of public importance can be considered the main rationale for regulation.It is evident to note that although these regulations are aimed at public interest but at times the competition aiming at efficient allocation of resources is distorted by particular sections for their very own interests.

 

ECONOMIC REGULATIONS AT A GLANCE

 

“Economic Regulations extend control over the price and supply of goods , the number of participants , and the conditions of entry. They purposively restrict the behaviour of economic actors, often imposing large costs on corporations and the consuming public. They shape economic development by influencing the determination of what is produced, where it is produced, and how it is produced. In recent decades, the dialogue surrounding regulation has been animated by discussions of efficiency, cost-effectiveness and the need to balance costs and benefits.[7]”

 

In the Indian context,it is evident to note that economic regulations have been mostly aimed at preventing or tackling market failure. The Foreign Trade(Development and Regulation ) Act , 1992that aimed at facilitating the imports into and augmenting exports  from India and the Electricity Act of 2003, that aimed at allowing the State Regulators to fix tariffs for power consumption in order to prevent suppliers to act as natural monopolies  and take the advantage.

 

The status before the 1991 reforms was that government owned monopolies were main providers of infrastructure and utilities. “These monopolies were established under the rationale that facilities required for rendering infrastructure and utilities are natural monopolies and a single provider would offer these services more economically. It was believed that vertically and horizontally integrated units would be better placed to provide these core services. It was also believed that monopoly power in such core areas should rest with the public sector to protect the consumer from exploitation by the profit motive of a private provider.[8]”

 

The 1991 reformsled to establishment of regulators. The main motive was to have innovations within organisations, bring in more transparency and accountability and to establish corrective measures to address the market dynamics.

 

Reserve Bank of India was established in 1934 itself but after 1991, a series of organisations were brought into the regulatory picture. Securities and Exchange Board of India(SEBI)was established in 1992.The other regulatory agencies werePension Fund Regulatory and Development Authority, Insurance Regulatory and Development Authority. For competition, Competition Commission of India (CCI),Insolvency and Bankruptcy Board of Indiarelated to company lawand for infrastructure Central Electricity Regulatory Commission (CERC), Telecom Regulatory Authority of India, Airports Economic Regulatory Authority etc.

 

Post 1991, there was onset of regulatory reforms and there was the introduction of regulatory regimes. In the beginning of the 21^stcentury, it could be stated that “Government efforts were progressive in promoting competition in the market place. In some areas such as telecom, civil aviation, insurance, railway container traffic, gas distribution etc., government monopolies were curbed by allowing the private sector to enter.[9]”

 

Thus, it is evident that the economic reforms were aimed at bringing in a shift from regulation of markets by the departments of government to monitoring by specialised regulators. The most important question in the recent time is that ‘Have the regulatory agencies been successful in achieving their goals?’ The answer is a mixed yes and no. The regulatory agencies have been avenues of change and brought in focus on sector specific transformations and reforms such as SEBI in the equity market and CERC giving a fillip by enhancing generation capacities, creating networks, improving and giving access to improved service quality.

 

On the contrary, we can see some undesirable outcomes as well .The problems can be stated as –‘overlapping jurisdiction, unintended market distortion and poor enforcement.’ It was observed in the recent times, that RBI had a miscalculation of the repeated banking crisis. As stated above, there has been changes brought in by CERC that have worked well but it is evident that a suffering of the power sector continues. The financially weak DISCOMS have been producing a ‘domino effect’ on the power sector by not paying power producers thus resulting in the failure of servicing debt. This leads to ‘regulatory uncertainty’.

 

It is necessary to look at health of the regulatory bodies as well.At present, some of the regulatory bodies are less empowered with ‘shortages in manpower and technical expertise.’

There is also at times conflicts in orders that are given by regulators having overlapping mandates.

 

The latest addition to the regulations is related to the digital economy.The CCI aims at regulating the competition issues in the ‘E-commerce sector’. The regulation relates to ‘deep discounting,the imposition of unfair terms and conditions , the growing dependence of brick and mortar establishments on online platforms and the opaqueness in search rankings.’

 

 

 

COMPETITION AND REGULATION – THE RIGHT BALANCE

 

In the book ‘In Service of the Republic’, Vijay Kelkar and Ajay Shah state, “There is need for more freedom and competition to push firms to innovate ,cut costs and deliver the best bargains for customers. There is need for public policy to address market failures, reduce entry barriers and increase competition.”Hence, competition and regulation go hand in hand and alone competition without regulation can lead to abnormalities and thus, proper regulation acts as an impetus to address the market dynamics. The crux being striking a right balance between competition and regulation as it is evident that over regulation is authoritarian rather than facilitation.In the beginning of 2020,the government proposed amendments to the Competition Act, including critical changes to the scope and functioning of CCI. Thus, it is clear that the government has to bring in such policies and regulations that are aimed at bringing in competitiveness and promotion of economic democracy.

 

 

 

 

 

PRESENT SCENARIO:

REGULATION AND COMPETITION IN THE TIMES OF  CRISIS

 

The COVID-19 crisis has sent shockwaves across nations as the implications of it on the global economy has been a bolt from the blue. The sufferings from the coronavirus outbreak do not seem to end so easily and the economy, considered the backbone of any nation, seems to be in perils. This is bound to have implications on competition and competition related regulations.

 

“The EU and the US have issued expedited antitrust review procedures and decided not to interfere with necessary and temporary measures taken to address supply shortages.These include collaboration and data sharing between competitors on projects related to health and safety.In the UK, a COVID-19 taskforce has been set up to deal with cartels and prevent price gouging of PPEs.Competition authorities have also made it clear that the crisis should not become a cover for non-essential collaborations to obtain economic benefits by restricting or increasing the cost of essential supplies. [10]”

 

In India, “the competition regulator CCI has cautioned companies from taking advantage of the COVID-19 situation and engaging in anti-competitive practices, but allowed for greater coordination in the critical sectors of healthcare and essential commodities and services.[11]”

 

THE WAY AHEAD

 

It is evident to note that regulation and competition go hand in hand.In the case of India, there have been some major breakthroughs since 1991 and reforms have been brought in.The outcomes have been desirable as well as undesirable but it is evident that the harmony between regulation and competition is a must to have a healthy economy.

 

For having better outcomes from the regulations aimed at promoting competition, the following should be taken into consideration in the future:

• The need for revisiting and assessing the competition related issues in the country.
• There is a need that the conflict of interests in State’s ‘proprietary and regulatory roles’ should be examined.
• In view of competition, it should always be kept in mind that ‘consumer benefits should be greater than costs.’
• The assessment of ‘over regulation’ and ‘under regulation’.
• There is need of more evidence based approach and the policies should be data driven as well.
• There is a need of streamlining the jurisdiction for each regulator

 

 

 

CONCLUSION

 

“Competition is to a market economy what a free franchise is to a democracy.”

-Nitin Desai

(Former Under Secretary General, United Nations)

In India, with the growth and fortification of the market economy and with the expansion of the various sectors after1991, it is evident that government cannot take everything under its control.Thus, the need for harmonising the relation between competition and regulation arised. After the paradigm shift in the Indian Economy, the interface between competition and regulation seems that the two complement each other. Competition is an integral part of the market economy and regulations are the essential element that necessitates the growth of competition thus aiming at the economic growth of a nation.Regulation should not be considered as an intrusion that is initiated in a naturally self-regulatingmarket place but it should be considered as ‘a tool to limitmonopoly power’ andthat creates and aims at policing the ‘conditions for effective competition’. It is evident that regulation for competitionwill continue to be necessary.In a nutshell, regulation and competition are in tandem with each other and thus both are halves of the same part, hence being sides of the same coin.

 

 

Ananya Kanth

(Ananya Kanth has done her graduation from VKM, BHU, Varanasi and holds a Bachelor’s degree in Political Science. She is currently pursuing her Masters in Regulatory Governance from TISS, Mumbai. Ananya has interests in the disciplines of policy making,regulation,politics and international relations.)

 

Disclaimer: This document was originally submitted to Dr. Ganesh Munnorcode at Tata Institute of Social Sciences, Mumbai.

 

References

 

1. http://regulationbodyofknowledge.org/faq/market-structure/promoting-competition-what-are-the-different-ways-to-promote-competition-in-a-utility-sector-and-what-can-be-the-regulators-role-in-doing-so

 

2. Regulations & Regulatory Governance,David Levi-Faur, Jerusalem Forum on Regulation & Governance.
3. Economic Regulatory Policies: Regulation and deregulation in the historical context,M.A.Eisner,Wesleyan University, Connecticut
4. org/faq/market-structure/competition-oversight-what-can-be-the-role-of-the-regulator-in-designing-rules-that-limit-anti-competitive-behavior-by-the-incumbent-operator/
5. Mankiw, N. (5th Edition). Principles of Microeconomics. South Westen Cengage Learning.
6. Singh, V. V. (n.d.). Regulatory Management and Reform in India. CUTS International.
7. Eisner, M. A. (1994). Economic Regulatory Policies:Regulation and Deregulation in Historical Context. In D. H. Rosenbloom, Handbook of Regulation and Administrative Law (pp. 91-116).
8. Agrawal, O. (n.d.). Role of Independent Regulation in Economic Reforms.
9. S.Mehta. (2007). Competition and Regulation in India 2007. CUTS International.
10. Taken from “Coronavirus Crisis- Keeping up with the competition”, Financial Express-dated April 16, 2020.
11. Taken from “Competition Commission cautions businesses against unfair practices amid coronavirus pandemic”, Economic Times-dated April 20, 2020.