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Government policies hamper competitive neutrality

Published : Nov 23, 2015, 1:12 am IST
Updated : Nov 23, 2015, 1:12 am IST

A large number of cases before the Competition Commission of India show how policy distortions lead to them.

A large number of cases before the Competition Commission of India show how policy distortions lead to them. If only, our draft National Competition Policy (NCP) is implemented the case load will mainly be of firm level malpractices and distortions addressed separately.

Let me take the case of our four public sector general insurance companies who were recently hauled up for collusion. Were they at fault for doing it Not really, since they were following the government diktat to coordinate their marketing including to not to poach on each others’ clients.

These four companies: National, New India, Oriental and United India had a combined loss of Rs 1,500 crores in 2012 and were fined Rs 671.05 crores as penalty for bid rigging in a case involving the government of Kerala’s Rashtriya Swasthya Bima Yojana. United India won the bid and agreed to share 10 per cent of its profits on this business with National and New India.

On May 24th, 2012 the department of financial services directed the four companies to coordinate their marketing activities. The paradox of the government order was that the then secretary of financial services was Dinesh K. Mittal who had moved from the department of corporate affairs, where he had launched the efforts for NCP. His successor, Naved Masood commented stoically that “officers take a stand where they sit”. Indeed, a sad example of our government working in silos and selective amnesia.

Another example from the financial services domain is how banks coordinate the interest rates on savings account. After receiving the 11th M. R. Pai memorial award in early September, former deputy governor of RBI, Kishori Udeshi came down heavily on banks for cartelising on saving account interest rates, aided by the Indian Banks Association.

“When the RBI has deregulated the saving bank interest rate in October, 2011, most banks fixed the same at four per cent. Are we to believe that the cost of deposit mobilisation is the same for all banks — big, small, public, private, foreign — and that has remained static since 2011”, she said.

No case has yet come up before the CCI but can we believe that the government is not a tacit supporter, because of the preponderance of public sector banks which occupies over 73 per cent of the market.

Another policy induced distortion which landed in the court of CCI is that of abuse of dominance against Coal India Ltd, when it was fined Rs 1,773 crores. (This order has been stayed by the Competition Appellate Tribunal and the case is still awaiting closure). This energy behemoth is a government monopoly and lack of competition has made it complacent.

The government refuses to break the monopoly in spite of various demands though some amount of deregulation has taken place by allocating captive mining to large users with a future provision of flexibility to sell their surplus production. The corruption in an earlier scandalous allocation of mines was another violation of competition principles by not following competitive bidding.

That has been addressed in cases of private sector by following a public auction route, though PSUs continue to get them through the nomination route. In this process some concerns have been raised by companies such as Jindal Steel who claim to have been discriminated against. Jindal Steel’s complaint is basically on lack of competitive neutrality and particularly to cancel their coal block allocation in Chattisgarh (won in recent auctions) and award it to the power sector.

They claim that their steel plant would generate much more employment than the power plant, and that they had also proposed a power plant in their steel conglomerate. Competitive neutrality is another victim of government policies and practices where the public sector gets a preferential treatment over the private sector. It has been covered under the NCP as a recommendation to enable the government to clean up such policies which distort neutrality.

Countless examples exist in our governance such as SEBI or even the Supreme Court inviting tenders for deposits only from state owned banks. Or flying only by Air India when on government business, or sovereign guarantee to LIC policy holders and not to other private life insurance companies’ policy holders and so on. Few days earlier, private sector transmission line companies raised the issue of nomination to the PSU: Power Grid Corporation without inviting tenders.

What beats common sense is that if any sector has been deregulated, the step motherly treatment is a sort of admission that the public sector needs to be mollycoddled for all the time; competition could go to hell.

The whole purpose of deregulation is then lost, and consequently the economy suffers. The other problem is such anticompetitive practices cannot be challenged under competition rules, because they are sanctioned by a policy.

At CUTS, we have been documenting such competition distortions in a quarterly dossier (http://tinyurl.com/nflrxf4) which will show the reader the rainbow lucidly. It also carries a section on food for thought which can be an easy checklist for reviewing the policy on the touchstone of competition.

One of the recommendations of the NCP is to carry out competition impact assessment of government policies, laws, regulations and practices to address the distortions by presenting a cost-benefit analysis.

Fortuitously, the CCI has launched such a programme by inviting research institutions to register with them to carry out such studies. Once this programme is set in motion one can hope to start the corrective processes, subject to the typical hurdles, and take our economy up a new growth path, or the second big wave of reforms after 1991.

The writer is secretary-general, CUTS International