Madhav Mehra's Blog

I am awed by the august presence  of distinguished luminaries  on the dais and legal giants  among the audience and seek forgiveness for my immodesty, audacity and temerity  in addressing you on a subject  where most of you are acclaimed authorities and I am a complete novice.

It is now widely accepted   that a robust competition policy is central to economic growth & therefore must precede any other reform. Price liberalization, unless accompanied by competition laws and policy aimed at controlling economic behaviour and structures, can result in substantial price thus defeating the object of reform.  If monopolistic structures in the form of privatized state monopolies are allowed to continue

Unchecked, price liberalization will not achieve its purpose. Even liberalized FDI that is supposed to enhance competition can encourage anti-competitive behavior and abuse of market position unless safeguards in the form of strict enforcement of competition law exist. Finally an economy that has implemented an effective competition law is in a better position to attract foreign direct investment than one that has not.

 Finally, opening of markets through import competition and FDI liberalization might bring enhanced competition, but if no safeguards exist foreign firms might also engage in anticompetitive practices and abuse dominant market positions. Hence the critical need for a strong and effective competition law that  will ban anticompetitive agreements and encourage conduct that will demonstrate larger  public benefits.

 There has been growing empirical evidence that open and fair competition that calls for a transparent behavior for all market participants leads to greater  innovation and accelerates productivity growth. Thus building a strong correlation between the effectiveness of competition policy and growth. Competitive markets give consumers wider choice and lower prices and give sellers stronger incentives to minimize their costs andcut through innovation and other productivity enhancing techniques. Firms are expected to pass on cost savings to the customers and offer better products and greater choice thus enabling the the poor to access the market and drive a spiral staircase of innovations that leads to inclusive growth.

Some ten years ago I came across a book called “Mastering the Dynamics of Innovation” by  James Utterback, MIT Professor of Management . It had  a transformed my take on competition.  The book revealed to me  an much closer   link between competition  policy and innovation than is generally realised and indeed is the reason behind my obsession with  competition as the key to achieve India’s global dreams.

Prof. Utterback  gives a fascinating account of  how real innovation always comes outside and how  rank outsiders have overthrown successful companies after protracted battles in which dominant players abuse  their dominant position,  size, costs and marketing prowess including disinformation and disguise to delay as long as possible the cutting edge technologies that eventually replace them. His case studies include the 50 year battle in which refrigeration replaced New England’s block ice industry and the 30 year battle to replace gas lighting which the electric lighting. Edison’s genius in this fight wasn’t confined to products and lighting systems, he leveraged the physical and mental infrastructure of gas lighting systems to run his wiring through gas conduits and to sell his “electric flames” to replace gas flames in the same sockets.  

 The following quote sums up the  thesis of James Utterback:

 “Industry outsiders have little to lose in pursuing radical innovations. They have no infrastructure of existing technology to defend or maintain and, as is made clear through the case of ice innovators in the southern United States, they have every economic incentive to overturn the existing order. Industry insiders, on the other hand, have abundant reasons to be slow to mobilize in developing radical innovations. Economically, they have huge investments in current technology; emotionally, they and their fortunes are heavily bound up in the status quo; and from a practical point of view, their managerial attention is encumbered by the system they have−just maintaining and marginally improving their existing systems is a full-time occupation. Owners and managers of dominant firms who are deliberate in their pursuit of radical innovation are remarkable and few.”  (p161-162)

 The irony is that each start up repeats this behavior once he becomes successful . Thomas Edison, the inventor of the light bulb  himself is a classic example. A radical innovator himself who once fought the entrenched gas lighting companies and claimed  ”We will make electricity so cheap that only the rich will burn candles” fought protracted battles against his competitors offering better technology.   

 Alarmed by the success of his competitor George Westinghouse, Edison launched a smear campaign to demonstrate the dangers of alternate current even going to the extent of electrocuting animals to make his point.

 Most radical innovations occur with new entrance attempting to break an established set of competitors rather than within firms whose capital resources are tied up to the existing technologies. From the Forbes’ list of 100 top companies of 1970 not one is making money. Schumpeter , the great Austrian economist, described the process as a creative destruction.

 In this oxymoronic world of constant turbulence and turmoil where the truth itself has become ambiguous and paradoxical , Transparency is the only way to survive.  Had Toyota or BP or Commonwealth Games OC or the IPL or Lord Widgery Chief Justice of England and Wales in 1970s , been transparent in their conduct they could have avoided so much flak.

 On 30 January 1972, unarmed civil rights marchers were fired at by a Parachute Regiment of the British Army killing 13 males including 7 teenagers. The outcry led to the appointment of a Tribunal under Lord Widgery, the then Lord Chief Justice of England and Wales. The report exonerated  the army and said “there was no reason for a soldier to fire at the marchers unless he was fired at in the first place.” The public outcry finally led to the appointment of a second commission of enquiry in 1998 under Lord Saville assisted by one Canadian and another New Zealander jurist who was later replaced by an Australian. The report published 12 years later with testimony of 900 witnesses and cost of £195 million held the army responsible for the massacre and stated soldiers had concocted lies to hide their acts. A note discovered in 1992 showed Ted Heath, the then prime minister, reminding Lord Widgery ‘we are not just fighting a military war in Northern Ireland, we are fighting a propaganda war as well”. The failure to face the truth resulted in an explosion of violence in Northern Ireland and complete alienation of Catholics who till then had backed British Army as being neutral.

Widening disparities are our biggest challenge. We are living in one of the most inequitable worlds in history.  1181 individuals have more wealth than the rest of 6 billion. In Fault Lines, How Hidden Fractures Still Threaten the World Economy, celebrated economist Raghuram Rajan demonstrates how sharpening inequalities have been the root cause of the shifting of earth’s tectonic plates in 2008. It was the unequal access to education and health care in the United States that put average middle class Americans into  deeper financial peril, even as the economic choices of countries like Germany, Japan, and China place an undue burden on America to get its policies right, thus resulting in sub-prime crisis.

 India has had much to celebrate over the past decade that has understandably led to a growing conviction among Indians that the upcoming century belongs to India. India has become one of the world’s fastest growing economies with a global presence in automotives, business process outsourcing, telecommunications, pharmaceuticals and information technology. India’s GDP in purchasing power terms is $3,526 billion averaging a GDP growth rate of 8.5% for the last five years. This makes India world’ fourth largest and second fastest growing economy. The harsh reality is India is also home to world’s largest number of illiterate, undernourished and hungry people. Of the 771 million illiterates in the world 268 million are Indians. While its GDP and Sensex has been registering meteoric rises, growth in literacy has been paltry 12% over 10 years. This has dragged down India’s Human Development Index to a shameful 128, one of the lowest. According to research conducted by Professor Tim Besley of London School of Economics , a one percent rise in GDP amongst low income countries translates on average, globally, into a reduction in poverty of 0.73. In India the figure is 0.65. In Kerala, Punjab and West Bengal the ratio is above unity, while in Rajasthan it is 0.43, in Maharashtra 0.4, and Bihar a meagre 0.3.

 India’s growth narrative is linked to the dreams and hopes of its youth. The only way to realise this dream is through a nation wide explosion of innovation. This requires free, fierce but fair and open competition that is possible only through judicious framework for competition policy and law. Our aim is to show competition law as a driver of inclusive growth that leads to sustainable prosperity. India’s Planning Commission in its mid-term review of the 11th five year plan (2007-2012) has adopted “Inclusive Growth” as a guiding principle.

 Competition policy is a complex cross cutting policy. The application of the competition law is born a public policy challenge than a legal argument. Competition law is an economic law and needs to be viewed and implemented in its socio-economic context.

Our legislators, policy makers, the lawyers, judiciary and the administrators have to remember what according to Gandhii was the purpose for all our effort. Every action we contemplate or propose should in its implementation wipe the tears of poor and downtrodden. Only when we have wiped the tears from the faces of all the poor, have we truly arrived as the nation.

Let us use the competition law as an instrument that bridges the divide between India and Bharat.

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