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State, market and competition

The continuing experimentation by various countries to arrive at a "grand compromise" between the state and the market makes it clear that this issue cannot be resolved through a precise formula satisfying all conditions and countries.

Over the past few decades, the role of the state and the market within an economy has been the subject of massive intellectual and political deliberation across countries.

Nevertheless, the continuing experimentation of various countries to arrive at a "grand compromise" between the state and the market has taught one fundamental fact: This issue cannot be captured through a precise formula satisfying all conditions and countries across continents.

However, it must be noted that on the one hand commentators and other protogonists , usually urged by business, have been particularly severe on government should it continue to have an overwhelming influence on the national economy, while on the other they have also blamed the very same government of failing to intervene should there be a market failure.

In short, the nature of intervention by the government in an economy both in quantitative terms and timing continues to befuddle everyone.

One must hasten to add that this disorientation is not merely an intellectual failure to address the extant issue at the abstract level. Rather, it has been one of attitudes of extreme reluctance of governments to reduce their interventionist role in modern economy.

Markets to dominate
Reforms worldwide centre on the withdrawal of the state from the commanding height within an economy and simultaneously allowing the market read competition to dominate.

Strange as it might seem, post reforms, many a government even today is yet to completely exorcise itself of the phobia of the market, appreciate competition and understand the resultant "creative destruction."

It may be amusing to note that governments, despite evidence to the contrary, seriously believe that even today they can "correct" the functioning of the market through intercession.

Govt. intervention
For instance, a domestic airline reporting a loss though not an exception in an industry that despite posting whopping growth rates has been in a dash of red lead the Civil Aviation Minister to advise the industry to "check blind competition" and warn that, "new applications would go through stricter scrutiny."

Perhaps, the government feels that the level of competition is unhealthy and hence unsustainable. As an immediate fallout, airline companies promised to "rationalise" their operations a euphemism for withdrawing from loss-making routes and bring down the level of competition.

The worrying point is that this "intervention" would be taken as a benchmark. Obviously, Ministers have to necessarily interfere should the steel or car industry post losses and advise against manufacturing a particular variety of steel or a model of car. If they do not "interfere", they would be deemed as not being proactive. A classic case of doomed if they do, dammed if they don't.

This virus of late seems to have spread even to regulators that are to act as mere referees in the functioning of the market. Today, because of the intervention of insurance industry regulator there is the strange spectacle of insurance companies offering a uniform premium for certain types of insurance. Similarly, the telecom regulator recently suggested a uniform rate of Rs 5 for every pay channel.

Prophetic words
Dissenting from the fundamental assumptions of the S. V. S. Raghavan Committee formed to draft the competition policy, Sudhir Jayantilal Mulji, economist, businessman and journalist, had cautioned, "The Government, had finally recognised that those disastrous years of control, regulation and protection have made India an economically soft state. That was the reason why they asked us to implement a shift away from monopolies and to promulgate competition; but regrettably this was not explicitly emphasised, couched as it was in the customary vague language of government communications. As a result committee members interpreted their role as being broadly to revise the existing MRTP Act and bring it in line with the Monopolies legislation of other countries."

Even a committee formed to bring in competition was ushering in state-control in a disguised manner.

Clearly making out a case that the proposals of the Commission of suggesting that the Government was to regulate competition were wholly inappropriate for India at this juncture of development, he explained that "we should aim at promoting freedom of markets" and in the process even tolerate "market excesses" to bureaucratic excesses so as to release "animal spirits among Indian businessmen the first and the most difficult task of policy-makers."

Other economists call it creative destruction the economic equivalent of Darwinism.

Strange Silence of Business
Strange as it might seem that it is not only the government with its proclivity for control that is to be blamed.

The silence of the business class, especially the bigger ones, in this context is indeed deafening. Rather it seems that even Indian businesses too are reticent about competition and find it convenient to seek government intervention.

One recalls the well-known work of Messrs Raghuram Rajan and Luigi Zingales, Saving Capitalism from Capitalists. Capitalism, market and competition in India have to be saved both from state intervention and the reluctance of big and established business to subject themselves to market forces.

For instance, the problem with the Foreign Direct Investment policy for the airlines sector is that even though 40 per cent foreign equity is permitted, no foreign airline is allowed to take a stake directly or indirectly.

Why a foreign airline is not allowed a stake in an Indian aviation company (the existing policy of allowing only non-airline companies to invest virtually renders the FDI limit superfluous) defies all economic logic, except that it is "convenient" for the "incumbent" players.

The real challenge for the government is to ensure it protects the market rather than protecting those who wish to dominate it. Usually governments end up doing the opposite.

Intriguing intervention
The manner in which successive governments post-reforms have sought to intervene in the market is indeed a study in itself.

The very idea of regulating the market through ministerial diktats or otherwise runs against the grain of the reforms itself.

It would suggest that there is a conspiracy of sorts between the government machinery and established businesses to stymie competition.

Doing so increases the relevance of government as much as it suits business houses. No wonder, it seems to go well with both industry and government.

Published at: http://www.thehindubusinessline.com/2006/11/16/stories/2006111600490800.htm

Last modified on Friday, 19 July 2013 17:13

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