Like Us? Spread the word!
[29 Dec 2017] [Update-1]- The CCI recently published its latest decision on maintaining competitive neutrality in the market in the matter of sale of molasses to country liquor manufacturers in Uttar Pradesh. The “Molasses Policy” of the UP Govt. historically for a certain minimum ratio of molasses produced to be sold to country liquor manufacturers in UP. Taking advantage of the reservation provided under the prevalent policy, country liquor manufacturers provide abysmally low prices to the sugar manufacturers for purchase of molasses. The CCI held that the low prices offered by the liquor manufacturers are not a result of the collussion but majorly due to the prevalent Molasses Policy of the State Govt. The CCI noted that, ". . the Policy of U.P. Government is a major factor in determining the price of reserved molasses. Thus, it is evident that the provisions of the Molasses Policy of the U.P. Government have a huge and decisive impact on the price of molasses." The CCI further observed that, "for a fair competition in the market, there should neither be any reservation nor any dispatch ratio, and the market forces should be allowed to discover the price of molasses without getting impacted by any policy constraints."
As the European Commission states, “A company which receives government support gains an advantage over its competitors.” Hence, Article 106 prohibits Member States from subverting the effectiveness of the competition rules by granting special privileges or exclusive rights to businesses (subject to exceptions). The primary reason behind the same is that such privileges go against the objective of achieving an undistorted playing field for businesses across EU- known as the “single market”.
An important aspect of Article 106 is that it prohibits States from adopting measures which enable private undertakings to escape constraints of competition provisions. Lest it be be forgot, EU Competition Law prohibits any abuse by one or more undertakings of a dominant position, even if such abuse is encouraged by a national legislative provision.
Being short-sighted in the age of globalisation could have long-term consequences in the domestic market. What chances of success would the Government’s Make in India have, if the foreign investors understand that the Govt. policies work towards excluding them from the market? Creation of such artificial barriers to entry or distorted market conditions is not going to increase investor confidence.
The ruling brings policy decisions and (potentially) statutory action of the Govt. within the purview of CCI. The new disposition (if it turns out to be one), would herald a new era of stream-lining Indian anti-trust jurisprudence with those of more developed countries.
GLOBAL ASPECTS : LOCAL APPLICATION
Two aspects of the global competition law enforcement are pertinent to be taken note of here.
Firstly, lets discuss Article 106(1) of the Treaty on the Functioning of the European Union (TFEU- the umbrella Treaty regulating all affairs of the European Union). Article 106 is a prohibition addressed to Member States of the European Union (EU).
That being said, India is not a capitalist economy. We are still bound to an extent by socialistic concerns for the deprived and marginalised sections of the market. Even though we are quarter of a century into liberalisation, Govt. protection is nevertheless considered necessary, especially for smaller businesses.
“Capitalism, or more precisely, the free market system, is the most effective way to organise production and distribution that human beings have found … healthy and competitive financial markets are an extraordinarily effective tool in spreading opportunity and fighting poverty. …Without vibrant, innovative financial markets, economies would ossify and decline.”
Raghuram Rajan's introduction to his much-vaunted book is what developed economies live and swear by.
Subscribe to TalkComp!
Copyright © 2018 Talking Competition All Rights Reserved
© 2018 Talking Competition. All rights reserved.Disclaimer-The thoughts and opinions mentioned in the present article are those of the author and may not necessarily reflect the views of the Talking Competition Team. The present opinion should not be construed as legal advice. For more information, please contact Danish Khan [email@example.com]. The present article is protected by Copyright Law(s).
The Central Government has wide ranging powers to subvert the application of the Act and Competition Commission of India (CCI) itself, such as providing exemptions and even superseding the CCI. Such leeway to the Central Government give a hint of CCI being undermined by the authority of the Government - or more particularly the competition (or economic) policy of the Government.
It is not to be said that sovereign functions of the Government should be within the purview of competition law. In fact, it is essential that state monopolies be maintained in critical sectors of currency and atomic energy. However, the sovereign functions of the Govt. cannot be stretched to include any and every Government action, especially those which serve to unfairly alter the competitive market structure- more specifically known as the problem of “competitive neutrality”.
Those following the orders of CCI may remember its concerns while penalising jute manufacturers for cartelisation. The Jute Packaging Materials (Compulsory Use in Packaging Commodities) Act, 1987 mandates the compulsory use of jute bags as packaging materials for sugar by sugar mills. CCI was of the opinion that while the statutory requirement was made in order to protect the struggling jute industry 25 years ago, the protection may not be necessary now as the paradigm may have shifted. Further, the mandatory requirement of purchasing jute-based packaging materials stifles consumer choice and excludes manufacturers of equivalent products from the market. It may ultimately lead to monopolistic prices to the detriment of the end consumers of sugar.
[20 Sept 2015] [Danish Khan]
The Competition Commission of India’s attempts to restrict Government control of the market represent a streamlining of India’s competition jurisprudence along the lines of international best-practices
Secondly, a major step towards increased competitiveness in the market was recently adopted by the CCI. The CCI issued the Guidelines for Competitive Analysis of Government Legislations and Bills, which shall be effective January 1, 2017. Though recently introduced in India, such assessment is widely practiced in a number of countries around the world and considered a “Recommended Practice”.
The CCI noted in one of its earlier orders that it has jurisdiction to look into policy decisions of the Govt. if such policy distorts competition. The latest move is no more than an extension of that disposition. The CCI proposes to review select Government legislations to identify aspects which would be detrimental to the competition in various markets. This is aimed to rectify the problem of “competitive neutrality” as explained above, and represents a significant step in the right direction. Although the recommendations are not binding on the Govt., it would do well to give serious consideration to them for the sake of the economy and greater good of largest sections of the society.
The discussion forces us into the inevitable question: To what extent Government should intervention be allowed to distort the free-market?
First and foremost, it is important to understand that state monopolies need to be necessarily maintained in critical sectors like atomic power, currency and other such sovereign functions.
However, issues arise when we consider the intervention of the Govt. in non-sovereign domains. Free-market economy derives maximum benefit from a laissez-faire or hands-off approach by the Government. Valid arguments exist in favour of limiting Govt. “control” of the market. As Timothy famously wrote, "Protecting competition by focusing solely on private restraints is like trying to stop the water flow at a fork in a stream by blocking only one channel. A system that sends private price fixers to jail, but makes government regulation to fix prices legal, has not completely addressed the competitive problem"
Public restraints may have important consequences on economic development by placing barriers to business entry. Raghuram Rajan aptly arguesthat such anti-competitive public restraints may impact international entry into a domestic market."
What can be safely assumed is that a market-structure based on competition and free circulation of goods, services, people and capital is at odds with systems based on unfair compartmentalisation of the market through selective distribution or purchase arising out of Government instruction.
This does not mean that Govt. action is a per se evil in its operation in the market. Govt. intervention is of critical operation in certain situations, for instance, in state of exigencies. Even Article 107 TFEU justifies State Aid granted to make good damage caused by natural disasters or exceptional circumstances, as compatible with the internal market. Such Govt. intervention has a social purpose that has a minimal effect on competition.
Govt. interventions in situations of non-exigency should be limited and considered after weighing up the pros and the cons. A great example of Govt. intervention leading to net economic gain is the process of “standard setting” in technology. Although standard setting helps in achieving interoperability across products and provides a similar platform for all firms towards the ultimate benefit of consumers; “Standard-setting” can also result in IPR holders abusing their dominance to exclude competitors or block innovation of rivals. The positive effects of such Govt. intervention may outweigh their cost.
The answer almost inevitably lies in weighing up the costs and benefits. The Competition Principles Agreement (entered into between the Council of Australian Governments) provides a classic example of such "compromise". It provides that Govt. legislation should not restrict competition unless it is demonstrated that, (i) the benefits outweigh the costs; and (ii) the aims of the legislation can only be achieved by restricting competition. By doing so, the CPA ensures that the social character of Govt. intervention is not checked, while limiting the effect on the free-market character of the economy.
Such measures demonstrate a true commitment towards globalisation. The approach is something which the Indian regime would do well to adopt.
It may be argued that the TFEU is a transnational legal instrument and India doesn’t aim to achieve the “single market”. National legislations, like ours, are meant to serve the domestic interests first and foremost. However, this thought is short-sighted and underestimates the importance of a level-playing field as an attraction for prospective foreign investors in the domestic market. Come to think of it, what chances of success would the Government’s Make in India initiative have, if the foreign investors understand that, for instance, the Govt. policies work towards excluding them from the market? Creation of such artificial barriers to entry or distorted market conditions is not going to increase investor confidence.
THE APPROACH TILL NOW
As discussed in one of TalkComp's previous articles, the approach in India till recently had been that the ambit of Competition Law does not extend to encompass statutory or Govt. intervention. Allegations of abuse of dominance can only be sustained against entities which qualify to be an “enterprise” within the purview of the Competition Act, 2002 (More on that, here).
The Act provides such exemption to a limited (although inclusive) list of functions relating to atomic energy, currency, defence and space. However, the exemption has often been considered to include all Government actions, such as fixation of electricity tariffs by regulatory commissions and notifications in matters ranging from collection of taxes and haulage charges.
On one hand, we aim to maximise the foreign investment through increased limits of Foreign Direct Investment (FDI); on the other hand we are still worried how the “Mom-and-Pop” stores shall survive when Wal-Mart opens in every nook and corner of the country. In doing so, we are willing to over-look the obvious efficiencies and assured conveniences that such Multi-national brands would bring to the market.
The socialistic concerns lead to adoption of measures which aim to "promote" the smaller or domestic businesses by restricting/limiting competition in the market, even if such "promotion" is at the expense of quality or efficiencies which increased competition would introduce in the market.
All this leads us to the inevitable question: To what extent Govt. intervention should be allowed to dictate the play of market forces in the free-market economy? For instance, is it really maximising consumer benefit to ask the Govt. PSUs to source one-fifth of their requirements from MSMEs? Are we sacrificing the greater good by focussing on the protection of the few?
The concerns of CCI aptly encompass the problem of “competitive neutrality”, i.e., competition problems arising from implementation of Govt. directions in the market. While statutory powers of the Government cannot be usually called into question, such powers should not be considered as unbridled, especially if they are to the detriment of competitive market structure.
As reported earlier, the Competition Appellate Tribunal (CompAT) recently ruled that the issuing of a policy circular mandating co-operative societies to purchase from a particular seller could be investigated by the CCI. The order of the CompAT is nothing more than an extension of the principle of competitive neutrality. The CompAT observed that though the Registrar, Co-operative Societies had issued circulars in the purported exercise of his statutory powers, the fact remains that the circulars were regulating the supply of goods which could be purchased by primary agricultural societies from a particular seller.