My favourite Government Committee Report
Report of the High Level Committee on Competition Policy and Law
It’s a strange thing to say, I suppose, that one has a favourite (Indian) government committee report. To have a favourite anything, one would have to explore a large enough set; and it would have to be something exciting enough to want to choose a favourite.
Admittedly, reading these reports is part of my work1, and I have read about a 100 of them thus far. And I do have a favourite — Report of the High Level Committee on Competition Policy and Law (May 2000), chaired by S. V. S. Raghavan. There are three reasons why. First, the report begins with a good demonstration of an understanding of competition. Second, it makes a broad range of recommendations for a specific purpose. Third, the chair exercised great humility, and encourage dissent. I expand on these further.
What is competition?
The report early on notes that there is no generally accepted definition of the phenomenon of Competition. But, attempts to describe it as follows:
“Competition which is workable and effective is generally characterised by a sequence of pushing and pursuing acts of the agents in a particular market. Competition is the foundation of an efficiently working market system, which has several advantages over a planned economy and constitutes the precondition which protects freedom of decision and action of self-interested individuals or entities from leading to anarchy or chaos but rather to economically optimal, socially fair and desirable market results.” (p. xiii)
The report recognizes that competition has economic and social functions, and that competition is the disciplining element in markets. It shows a clear shift of the attitudes towards markets. The committee was established to suggest a policy and law to replace the The Monopolies and Restrictive Trade Practices Act, 1969 which favoured central planning and looked at markets suspiciously.
It also talks about competition as a process, rather than a state of affairs. Or, as Hayek (1946) put it, to discuss it as a verb and not a noun.
Competition Policy has, as its central economic goal, the preservation and promotion of the competitive process, a process which encourages efficiency in the production and allocation of goods and services, and over time, through its effects on innovation and adjustment to technological change, a dynamic process of sustained economic growth. In conditions of effective competition, rivals have equal opportunities to compete for business on the basis and quality of their outputs, and resource deployment follows market success in meeting consumers' demand at the lowest possible cost. (p. viii; emphasis in original)
I recommend reading these two essays by FA Hayek, which have informed my understanding of competition — The Meaning of Competition (1946) and Competition as a Discovery Procedure (1968) — where he argues that ‘competition has to do with the discovery of knowledge, specifically how discovery mechanisms uncover information about cost, innovation, and market preferences’ (Marginal Revolution University).
Competition Policy as a Genus
The report discusses of competition policy as a genus, of which competition law is a specie. While competition policy sought to encourage competition (primarily by removing government restrictions), the purpose of competition law was considered to address anti-competitive behaviour by market participants. The committee suggested a broad range of measures to remove various impediments to entry and exit into markets.
Removal of reservation for and reduction of privileges to small-scale sector products. Dismantling of the small-scale sector reservation policy began in 1997 and resulted in an almost complete removal of reservations by 2008 (Martin, Nataraj & Harrison. 2014. NBER Working Paper 19942).
Economic reforms of liberalisation, deregulation, and privatisation to be furthered.
Removal of all physical and fiscal controls on movement of goods throughout the country (such as octroi). This has been removed to a great extent, and the Goods and Services Tax went a long way in removal of local restrictions such as octroi, and create one national market.
State monopolies and public sector enterprises would also fall under the purview of competition policy to prevent monopolistic, restrictive, and unfair trade practices on their part, except where concerned with sovereign functions like defence. Actions of public sector enterprises have been investigated by the Competition Commission of India, but in my opinion they can go further.
Ease the exit of firms from market. Specifically, amend Industrial Disputes Act, 1947 and connected statutes to provide for an easy exit to non-viable, ill-managed and inefficient units. Labour laws continue to be excessively restrictive in terms of exit.
Eliminate Board of Industrial and Financial Reconstruction and repeal the Sick Industrial Companies Act, 1958. The Insolvency and Bankruptcy Code, 2016 replaced SICA to ease exit of firms.
Repeal of the Urban Land Ceiling Act, which restricted the amount of land an enterprise can hold in urban areas, and thus restricted benefits from economies of scale. The Urban Land (Ceiling and Regulation) Repeat Act, 1999 was enacted, but some states continue to have Land Ceiling Restrictions.
The Dissent within the Committee
Among the 9 members on the committee, notes of 4 members were published along with the report. While dissenting notes are not novel in Indian government committee reports, what I liked was the humility of the chairperson, S.V.S. Raghavan, his encouragement of dissent and the respect with which he treats the notes.
He writes the following in his introduction to the report
“I would urge the reader of the report to go through the minute of dissent given by Shri. Sudhir Mulji. The minute of dissent is a highly thought-provoking one. It is a delight to read.
Intellectually stimulating supplementary notes given by Dr. S. Chakravarthy and Dr. Rakesh Mohan should also be read.
In fact, I would go to the extent of recommending that the minute of dissent by Shri. Sudhir Mulji and the supplementary notes by Dr. S. Chakravarthy and Dr. Rakesh Mohan should be read before the main report itself is read. They highlight the apprehensions which, I also partly, if not fully, share. In my opinion, the consensus appears to be towards, as the Latin saying goes, ''festina lente", i.e. hasten slowly.” (p. xi; emphasis in original)
Dr. S. Chakravrthy’s supplementary note recommended implementation of the policy in a gradual manner.
Dr. Rakesh Mohan writes,
“Working on this Committee has been a most difficult experience for me… ? The problem has been that, whereas there is little in substance or in principle that I can disagree with in the Committee' recommendations on the contour of competition policy, I have had a continuous sinking feeling that I am contributing to something that could possibly stop the growing Indian economy in its tracks.” (p. 88)
He further writes,
What makes me feel uncomfortable in this activity is that not only are we recommending the creation of a new powerful governmental authority but we are also vesting it with tremendous discretionary powers. Yet, I am not in disagreement with the propositions outlining the various kinds of anti-competitive practices that need to be kept in check. The root of the problem is that modem competition policy and the kind of law that enforces it has to be discretionary in its essential characteristics. Removal of discretion through enlargement of categories of per se illegality would be worse than the cure. (p. 88; emphasis in original)
Sudhir Mulji believed that the order to establish the committee was misunderstood from the outset by the members of the committee, and they
“assumed wrongly that the government intended to introduce a law on the same lines as competition laws in other countries.” (p. 90)
He believed that the fact that 80 other nations had laws to regulate competition was not intellectually compelling enough for India to also have one. He wrote,
“What we should be promoting is freedom of the markets and we should even tolerate excesses… It is for me sad that after two hundred years of colonial rule, we have been emasculated from thinking about issues on first principles and continue to imitate the ideas of others.” (pp. 92-93)
P. M. Narievala makes a similar point in his comment of dissent, that competition law in other countries was implemented after free markets were allowed to operate and problems were identified, whereas in India, the law was being implemented as state control was being reduced.
Narielvala opines that premerger notification (the requirement that firms above a certain size need to get prior permission from the government for a merger) is not necessary. He argues based on the knowledge problem in economics,
“At the worst, a merger or amalgamation could lead to dominance but at the time of the merger, there is no way to determine whether the dominance would be abused.” (p. 94)
I agree with all the dissenting notes, and I think it’s incredibly sad that none of the recommendations of the dissenters were implemented. The Competition Act, 2002 is incredibly flawed and I think it does more harm than good. There must be a greater presumption towards Laissez-Faire — and a removal of any privilege granted to a firm.
Additional notes:
On imitation of policies of developed nations, read Shruti Rajagopalan and Alex Tabarrok’s 2019 paper Premature Imitation and India’s Flailing State.
Econtalk episode where Mike Munger and Russ Roberts discuss Antitrust Policy (America’s competition regulation policy). I love the test that Munger and Bill Duggan propose:
“So, what Bill Duggan proposed was we rank the firms by size from largest to smallest, post merger. And, then after the first firm, we draw a line. If there are none, it's a monopoly. Yes, that was an economics joke… I'm not kidding, I'm not kidding. That is totally the test we proposed. Because you need to do this in analytic terms. So, you have a set of steps. You draw a line after the first firm. If there are no more, then it's a monopoly. If there are more, it's not a monopoly and it should go through.”
Also, read this part from the report, which I find fascinating to no bounds:
But hey, like I tell my friends, I derive positive utility from both work and leisure.