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Competition Policy: India and the WTO

The Competition Bill which is before parliament has assumed an international dimension as well as a new sense of urgency in view of the decisions at the WTO Ministerial Conference at Doha. An examination of the Bill and the working of India's competition policy in relation to international practice and the likely direction of eventual WTO negotiations after 2003.

Of all the contentious issues that are being debated by members of the World Trade Organisation, the relationship between trade and competition policy is probably one of the least understood in India. While there has been exensive discussion of trade liberalisation, and also the newer issues such as intellectual property rights and agricultural subsidies that came on board during the Uruguay Round, competition policy has been on the international agenda for too short a time for its significance to be appreciated. In 1996, the Singapore Ministerial Conference of the WTO resolved to set up two working groups, one “to examine the relationship between trade and investment”, and the other “to study issues raised by members relating to the interaction between trade and competition policy, including anti-competitive practices”. Along with transparency in government procurement and trade facilitation, these came to be known as the ‘Singapore issues’.

The Working Group on competition policy has so far submitted five annual reports. However, following the unusual wording of its mandate, it has confined itself to reporting the very different opinions of member countries on various issues, with many of the same conflicting arguments being repeated from one report to the next. Consensus seems to be emerging only in respect of the need to control international cartels, to enhance voluntary cooperation between national authorities, and to provide technical assistance for developing countries. There has been considerable disagreement on whether even such limited measures should be under the aegis of the WTO. These discussions seemed to be going nowhere, but in the run-up to the Fourth (Doha) Ministerial in November, the industrial countries and the WTO director general made a strong bid to place the Singapore issues on the negotiating agenda. India and many other developing countries strongly opposed this move, and insisted that they required further study. Ultimately, a compromise was worked out, which has been given very different interpretations by different countries. In almost identical paragraphs, the Doha Declaration states that “recognising the case for a multilateral framework on... [the phrases elided are specific to each of the four issues] ...and the need for enhanced capacity building in this area, we agree that negotiations will take place after the Fifth Session of the Ministerial Conference on the basis of a decision to be taken, by explicit consensus, at that session on modalities of negotiations.”

Indian government spokesmen came back from Doha claiming that the commencement of negotiations on these issues would be based on an explicit consensus, which amounted to veto power being given to each member state. However, the Trade Commissioner of the European Union, who was visiting Delhi at the same time, declared that negotiations were mandated and only the modalities were subject to the consensus. It is clear from a plain reading of the Declaration, if not the realities of power, that the latter is the interpretation that will prevail. All that the developing countries have gained is a two-year respite and possibly some scope for quibbling on ‘modalities’. What is more, the Declaration commences the relevant paragraphs with a recognition of the case for a multilateral agreement, which will be binding on every member state, rather than a plurilateral agreement for which individual countries can sign up.

As it happens, the Doha denouement comes at a time when a new Competition Bill is before parliament. Already subjected to trenchant criticism in the business press and from industrial lobbies, it might not be passed in its present form, if it is passed at all. In order to contribute to this ongoing debate, which has assumed an international dimension as well as a new sense of urgency in view of the decision at Doha, it is necessary to examine the Bill, as well as the working of India’s competition policy, in relation to international practice and the likely direction of eventual negotiations after 2003.

The new Bill, which seeks to replace the 1969 Monopolies and Restrictive Trade Practices (MRTP) Act, improves upon it in many ways. It covers the usual three areas of anti-competitive agreements between firms, abuses of a dominant position by a single firm, and mergers, with a much more modern approach. It wisely avoids areas such as monopolistic pricing and ‘unfair trade practices’, which should not have been part of competition law in the first place. Unlike the MRTPA, anti-competitive practices such as predatory pricing are now clearly defined. Several criteria (in fact, too many) are laid down for judging whether an agreement is anti-competitive, a market position is dominant, or a merger will have an adverse effect on competition. Criteria for determining the relevant geographical or product market are also listed. The Bill provides for regional benches of the proposed Competition Commission, as well as specialised merger benches. It also provides for professionals to serve on the commission and in the director general’s office, and for hearing expert testimony. Firms violating the new law can be fined 10 per cent of their turnover, as against the modest fines provided for in the MRTPA.

Although the Bill has several advantages over the MRTPA, I share the reservations of several commentators concerning the actual implementation of its provisions. The multifarious criteria (13 each for determining dominance and the anti-competitiveness of mergers!) are often subjective, contradictory, or vague, and will be open to varying interpretations, leading to inconsistent verdicts and unnecessary harassment and business costs. They seem to have been lifted out of other countries’ laws or textbooks on industrial regulation, and will be of little help to a body that lacks institutional memory or theoretical understanding of their significance. The new commission will probably inherit most of the investigative staff and possibly some of the members of the MRTP Commission (MRTPC), and the same lawyers will appear before them. With all respect to them, they have little of the expertise required to administer a modern competition law in all its complexity. This is largely because of the bad drafting of the original MRTP Act, compounded by the 1984 and 1991 amendments. Detailed analyses of some of these problems have attempted in these columns by Jaivir Singh (EPW, December 9, 2000) in relation to so-called monopolistic trade practices and concentration of economic power, and by the present author in relation to predatory pricing and conflicting interpretations of the ‘public interest’ in competition policy (EPW, December 2, 2000).

Even on other competition issues, the MRTP Commission’s limited resources have been substantially diverted to dealing with cases of individual consumer dissatisfaction relating to deficiency in service (often non-delivery of apartments or cars booked with dealers), or adjudicating allegations of false advertising or misleading prize schemes, under the rubric of Unfair Trade Practices (UTP), which was included in the Act by the 1984 Amendment. For various reasons, consumers have found the MRTP route far more effective than resorting to the Consumer Protection Act (CPA). It is informally learnt that about 80 per cent of the 5,000 cases pending before the commission fall under these categories, which are not part of competition policy as it is normally understood. The new Bill does not have the UTP provisions, and transfers pending cases to the consumer courts to be dealt with under the CPA. But with its energies devoted to such issues, the investigative, prosecutorial, and adjudicatory wings of the MRTPC have not been able to develop an understanding of the important economic arguments required for the enforcement of a modern competition law. The director general’s office has (unsuccessfully) brought charges against firms for normal business behaviour such as reducing capacity utilisation or increasing prices more than costs. This represents perhaps a concern for establishing a ‘just’ price, which is anachronistic in a market economy.

In this context, the Supreme Court’s recent judgment in Rajasthan Housing Board vs Parvati Devi (AIR 2000 SC 1940) is welcome, in that it refocuses the law on behaviour that adversely affects competition rather than pricing. Also welcome are the provisions on predatory pricing in the new Bill which introduce cost and dominance criteria that will prevent it from being used to penalise normal price competition. However, in my earlier EPW article I have quoted MRTPC orders that show a lack of appreciation of basic distinctions such as those between marginal and average total costs, comparative and absolute advantage, predatory and discriminatory pricing, producer interests and the ‘public interest’, and the partial and general equilibrium consequences of import competition for employment. The subtle analyses required, for example, in deciding on the possible efficiencies resulting from a merger, or network externalities as barriers to entry, or exclusionary behaviour in one market in order to preserve dominance in another (the last two manifested for example in the recent Microsoft case), are far more complicated, and will require considerable capacity building. Yet a beginning must be made somewhere, and I suggest a possible agenda below.

 

WTO Scenario

Returning to the WTO scenario, one of the possible directions international negotiations could take is for countries to continue to enforce their own competition laws, but to extend what is called ‘positive comity’ to their trading partners. This requires some explanation. Suppose exporting firms in country A carry out anti-competitive actions (for example, form a cartel) which have adverse effects in the market of importing country B. Most countries have provisions in their competition laws (including section 14 of the MRTPA, and section 32 of the proposed Competition Act in India) that allow their authorities to exercise jurisdiction against foreign parties on the basis of what is called the ‘effects doctrine’. Country B could thereby prosecute A’s firms in B’s own courts on the basis of B’s laws. This however frequently runs into problems of gathering evidence and enforcing penalties, and could also be interpreted as infringing the sovereignty of country A. Under positive comity, authorities in A will entertain complaints from B and proceed against the firms in their jurisdiction on the basis of their own laws. This has worked reasonably well between the European Union and the United States in recent years. However, it requires similar regulatory frameworks and philosophies in the two jurisdictions. Although our new Competition Bill is much closer in spirit to the competition laws of the industrial countries, the lack of technical expertise, long delays in delivering judgments, and a basic approach to competition matters that is often very different to that which prevails abroad (displayed by the MRTPC in the predatory pricing cases, for example), make it hardly likely that India will succeed in obtaining the benefits of reciprocal positive comity.

Further, many of the restrictive business practices (RBPs) dealt with in the debates on trade and competition policy, such as export and import cartels and exclusionary vertical arrangements that restrict market access to imports, are not practised on a significant scale by Indian firms. The United States Trade Representative’s (USTR) latest Report on Foreign Trade Barriers (2001), which invariably comes down hard on any policy that impedes market access to American firms, actually ends up exonerating India on this score:

Both state-owned and private Indian firms engage in most kinds of anti-competitive practices with little or no fear of reaction from government overseers or action from a clogged court system. India suffers from a slow bureaucracy and regulatory bodies that reportedly apply monopoly and fair trade regulations selectively. These practices are not viewed as major hindrances to the sale of US products and services at this time, although US industry (e g, soda ash) has been denied access to the Indian market as a result of an adverse ruling by the government of India’s monopolistic and restrictive trade practices commission (P 187, emphasis added).

The italicised phrase implies that we have little to offer in terms of positive comity, or even to put on the table as bargaining chips. But what is interestings in view of the impending international negotiations is that the USTR’s grouse (which generalises wildly from the solitary soda ash example) is directed against India’s competition policy authorities, rather than against the RBPs that they are supposed to control.

So how can India avoid being caught unprepared when multilateral negotiations on competition policy eventually begin? One idea would be to bring into force various sections of the new Act at staggered intervals, as provided for in the Act itself, implement them aggressively against foreign firms, and then offer to bring them under international disciplines in exchange for suitable concessions. A good place to begin would be with cartels, where the MRTP Commission was somewhat active, and where there is considerable international consensus: in fact it is the only specific anti-competitive practice mandated by the Doha Declaration for study by the Working Group. Joining international actions against cross-border cartels would expose Indian investigators to international practices, and also stake a claim on behalf of Indian consumers for a share of the usually generous damages awarded in such cases. Leniency programmes for firms that provide evidence against their fellow cartel conspirators have proved useful elsewhere, and should be incorporated into the Competition Bill to avoid the lengthy and often unsuccessful cases under the MRTP regime. (Witness the activities of the cement cartel, whose pricing decisions are routinely reported in the media, and have continued for almost a year despite a pending MRTPC enquiry.)

India could subscribe to an international agreement rescinding the exemptions regarding export cartels in national competition laws, since the country is probably a victim rather than a promoter of such cartels. What has annoyed the USTR is the MRTPC’s injunction against ANSAC, an American soda ash cartel which is registered with the US government and exempted from American antitrust laws (see my EPW article for details). Although the commission’s approach to predatory pricing was questionable, the main grounds for its injunction, on which it was right on the mark, was that ANSAC is a cartel. We should adopt a more aggressive posture in prosecuting such cartels, with a view to getting an international agreement that prohibits them. Such prosecution should be on the usual grounds of conspiring to raise prices, rather than reducing prices. The latter is better handled by anti-dumping actions. In any case, with the Competition Bill explicitly introducing cost and dominance criteria for predatory pricing, evidence of international price discrimination (which is what the MRTPC looked at) would no longer be relevant. And India’s contention that the injunction on ANSAC comes under antitrust rather than trade policy will probably not go too far. For, in 2000, a WTO Dispute Settlement Panel and then the Appellate Body rejected precisely such an argument raised by the US in defence of its 1916 Antidumping Act, which requires a test of predatory intent. Ironically, India included itself as a third party in that case, on the side of the complainants, the EU and Japan. (see C Satapathy’s article in EPW, November 25, 2000.)

 

Merger Control

Lack of expertise is likely to create special problems for merger review, which was deleted along with most of Chapter III of the MRTPA (dealing with concentration of economic power) by the 1991 amendment, and is now being reintroduced in the new Bill after an unsatisfactory compromise. The initial proposal was for mandatory review of proposed mergers that would create entities exceeding a certain threshold level of assets or turnover. This faced tremendous criticism from business lobbies, and was diluted by making pre-merger notification voluntary, with a proviso that approval would be deemed to have been granted if no decision is reached in 90 days. But the Bill also allows the commission to look post-facto into a merger for which approval was not sought in advance, and to undo or modify it if it sees fit. This unscrambling of firms’ assets is likely to be a hugely costly operation, for which there is no official expertise thanks to the non-enforcement of Section 27 of the MRTPA. This allowed the government, after a reference to the MRTPC, to order the division of firms or severance of interconnections between them, and was the only section retained in Chapter III after the 1991 amendment. It bears mentioning that it had been invoked only twice before that – and one of these was a blatant attempt to muzzle The Indian Express during Indira Gandhi’s Emergency. (That reference was withdrawn by the successor government, while the other one was struck down by the courts.)

Expertise is lacking even for ex ante evaluation of mergers, which has not been possible since 1991. Even prior to that, it was focused more on preventing the concentration of economic wealth rather than market power, and mergers were usually sanctioned or denied by the government (on grounds that can well be imagined) without reference to the MRTPC. This was part of the discredited ‘licence-permit raj’. Modern merger review requires a careful balancing of the anti-competitive effects of greater concentration against several possible efficiency gains, with the merging firms obviously keen to exaggerate the latter. Therefore, merger review should be kept in abeyance for the time being for domestic firms. Apart from the lack of expertise, Indian industry needs to restructure after a decade of excess entry that followed the abolition of investment licensing for all but a handful of industries. This led to installation of excess capacities in a range of industries, fragmented amongst too many firms. (I believe this is one of the important reasons for the decline in total factor productivity growth in manufacturing in the 1990s, which has been established by several econometric studies in this journal and elsewhere.) A permissive approach to mergers may also be required as a prerequisite to further trade liberalisation, particularly since closures seem politically out of the question, and the existing policy towards ‘sick industries’ simply keeps resources unemployed for the duration of extremely protracted winding-up proceedings.

Mergers involving firms with foreign shareholding should be subjected to a stricter standard, since the terms of the trade-off between higher profits and reduced consumer surplus becomes more adverse with some of the profit going abroad, and several other deleterious effects are also likely. (See Nagesh Kumar’s article in EPW, August 5, 2000.) As a beginning, to reconcile this with the hands-off approach recommended for domestic mergers, the relevant sections of the Act can be activated, but only mergers involving firms with substantial foreign shareholding should be investigated, economising on the commission’s limited resources. (If such discriminatory treatment is not possible, the balance could be effectively tilted by reducing the thresholds for international assets, while raising those for domestic assets.) If a merger is found to be undesirable, pre-merger remedies, such as divestiture of brands and shareholdings, should be applied rather than post-merger dismemberment.

Even with the financial thresholds, some selectivity will be necessary lest the commission get inundated with merger cases, which it might have to clear after a perfunctory appraisal, due to the time-bound schedule laid down in the Bill. Since barriers to entry, such as import restrictions, high fixed costs, and advertising, increase the harmful effects of a merger, infrastructure (which produces non-tradable services) and branded consumer goods (which are also likely to benefit from high effective protection for the foreseeable future) should be high on the watch-list for the competition authority. The expertise thus gained can gradually be applied to domestic mergers. A better understanding of entry barriers is also indispensable for proceeding against cartels, predatory pricing and other forms of exclusionary behaviour, since these are feasible only when they result in an increase in profits which cannot be undermined by new entrants. (I have suggested a quantifiable criterion for entry barriers in my earlier article.)

To sum up, we need to start prosecuting cartels and mergers involving foreign firms more vigorously. The sooner we start, the better: having the new law in force, with some experience and expertise in its implementation, will strengthen our bargaining position when negotiations eventually begin, even if some of the more assertive postures have to be surrendered in the process of give and take. At present, our competition law represents little more than nuisance value to other countries, often without bringing much tangible benefit to Indian consumers except in the UTP cases.

 

Broader Issues

There are many policy objectives that are outside the ambit of the theoretical framework that is used in analyses of competition policy. This privileges a particular notion of ‘efficiency’ above all other criteria, and has not been decisive even in developed countries, where mainstream theory holds sway. Competition policy has often ignored it in practice, and has also been implemented inconsistently both within and between these countries. It is hardly likely that whatever common principles they happen to agree on at their current levels of economic and institutional development will be in the interests of countries at much lower levels.

In India, which lacks even rudimentary unemployment insurance, protection of employment will remain a live political issue. We need to keep in mind the fact that interventions that protect employment in one industry can cause unemployment in others, as I pointed out in my earlier EPW article. But our interlocutors at the WTO need to be reminded that Section 84 of the UK Fair Trading Act of 1973, for example, recognised balanced distribution of industry and employment as a legitimate criterion in assessing abuse of a monopolistic position and in merger review, and section 10 of its RTP Act (copied with minor changes as Section 38 of the Indian MRTP Act) allowed the prevention of reductions in employment or exports to be pleaded as ‘gateway’ defences of restrictive trade practices. In Europe and Japan, ‘crisis cartels’ were permitted until fairly recently to protect declining industries, and mergers were encouraged for the same reason, as well as to create ‘national champions’. (The move away from employment considerations in Europe in more recent years has as much to do with the availability of EU structural adjustment funds as to changes in political philosophies.) Even in the US, merger policies until the 1970s, as well as laws to control price discrimination, such as the Robinson-Patman Act and state laws on fair trading, were designed to protect small businesses, regardless of efficiency. And vigorous prosecution of price discrimination in the EU has more to do with the political objective of enforcing a single market than with efficiency.

Even as we reform our own unsatisfactory competition law, we must guard against the imposition of inappropriate standards by powerful countries which have been violating them until fairly recently. The west, it must be recalled, industrialised on the strength of tariff protection of its infant industries, highly polluting technologies, and brutal exploitation of labour both at home and in areas under colonial domination. Yet it now tries to impose free trade, environmental and labour standards on much poorer countries, with the obvious intention of opening their markets while crippling their export competitiveness. It is not immediately obvious how a competition policy agreement can be bent to serve similar purposes. One possibility is that a multilateral agreement against export cartels could be used to target producers’ associations and commodity boards that encourage exports by small producers in developing countries. Negotiators must be on their toes to avoid wording that would permit such an interpretation.

Equally, we must guard against abuse of certain provisions of the Competition Bill by the Indian government. The two expert committees that gave rise to the new law were cognisant of the possible misuse of so-called ‘public interest’ provisions, and recommended that they be exercised by the commission only in exceptional cases, with reasons being given. However, clauses 52 to 54 of the Bill allow these powers to be exercised arbitrarily by the government, without requiring any explanation. The government will have the right to exempt any class of enterprises, to give binding policy directions to the commission, and even to supersede it, all in the ‘public interest’. There is every apprehension that the autonomy of the commission will be compromised, and the law will be used for extorting political contributions. The government’s opposition to WTO negotiations on transparency in government procurement – the least controversial of the Singapore issues, and one that would also strike a blow against cartels engaged in bid-rigging – betrays its interpretation of the public interest. These new powers would also allow a government enamoured of multinationals (or suitably ‘educated’ by them, Enron-style) to force the Competition Commission to look benignly on foreign mergers and cartels, instead of taking the more assertive stand recommended here. These clauses should be dropped altogether; otherwise we might be better off retaining the antiquated MRTP Act.

 

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