Why Competition Law is central to India’s global dreams

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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Why have two decades of Indian reforms not translated into human development?

Heated debate has ensued on the impact of economic reforms since Prof Jagdish Bhagwati’s Third Hiren Mukerjee Memorial Annual Parliamentary Lecture in the Central Hall of India’s Parliament on December 2, 2010.   A news report by the Delhi-based FT Correspondent, James Lamont entitled “High growth fails to feed India’s hungry”, published in Financial Times on December 22, 2010, highlights difference in opinions between Prof Jagdish Bhagwati  and Dr Amartya Sen, the Nobel Laureate,  about the percolation of benefits of economic growth in India. In his rejoinder Dr Amartya Sen issued a stark warning about how “stupid” it was to aspire to double-digit economic growth without addressing the chronic undernourishment of tens of millions of Indians. He emphasised on the inequitable distribution of the fruits of economic growth among various states, which have led to the development of a dualistic economy.

Like most Indians abroad, it shames me  that despite two decades of reforms that made India  one of world’s fastest growing economies, we continue being  a nation with world’s largest number of hungry & malnourished. Why is India’s HDI is so abysmal and our gender inequality worse than even Pakistan? Why this growth did not translate into human development? Is human capital less important than financial capital? Is growth that does not liberate and empower humans worthy of pursuit?

The argument that reforms have reduced poverty is irrefutable. Equally irrefutable from the impeccable NCAER data is that benefits of reforms have accrued inequitably making rich richer and poor marginally better off. That sharpening disparties have led to destabilation is also not in dispute as government writ does not run a third of India already controlled by naxlites. In Fault Lines, How Hidden Fractures Still Threaten the World Economy, noted 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 thus leading to the  sub-prime crisis.

We must not fail to recognize that the incredible India story rests on its youth – its demographic advantage. It proved itself when Haryana youth rescued India out of the CWG mess by winning a record number of gold medals. It is this “revolution of perceived possibilities” that has made our entrepreneurs venture out  aggressively in every corner of the world.

India tops Nielson’s Global Consumer Confidence Index. Being one of world’s most youthful economies – median age of an Indian is barely 26 – it has a potential disadvantage. Inequalities are perceived to be injustice. In the age of virals, people would withstand poverty but not injustice. If Indian youth does not find jobs, it becomes an easy prey for  terror groups. Terror from within is far more lethal than terror from outside.

I have great respect for Mr Martin Wolf,  Chief Economics Commentator of UK’s Financial Times and therefore bemused that despite compelling evidence of excesses of high income people in running scams like CDOs and ponzie schemes that brought the 2008 meltdown, he could legitimately assert “High income countries are less corrupt, because their relatively educated populations will not tolerate it, to the same extent”. Companies that destroyed shareholder values were run and managed by some of the best boards. A Mackenzie director attended every board meeting of ENRON. LTCM board included the best Nobel laureates such as Myron Scholes, Robert Merton. Harvard Professor Palepu was part of the  Satyam  board, Dean of Stanford Business School was chairman of the audit committee of  ENRON and Henry Kissinger was a member of the  Hollinger board run by Lord Black who till recently was serving a 78 months prison sentence in US.

It has been noticed  time and again that it is difficult to make learned people understand something when their remuneration depends on not understanding it.

Greed has no constituency. Our markets are distorted because of this greed, making a farce of free trade and free competition. Architects of meltdown were well-bred, brainy and brilliant people. Seven out of ten were from Harvard Business School. It all starts with our obsession with success at all costs when our outcomes depend on our ability to handle failures – the speed with which we rise each time we fail.  The fault lines are with our educational system – the very HBS model that we so eloquently admire – whose immorality is illustrated by Philip Delves Broughton in his book “Ahead of the Curve” as also by Michael Lewis in Liar’s Poker. When you have to pay a king’s ransom to enter a business school, in the name of quality education, the natural urge is to recover your investment many fold. 

Indeed the minimal rate of defaulters among rural illiterate poor that led to the meteoric success of micro finance industry contrasted with the manner Berlusconi is thriving in educated Italy shows our modern education has little correlation with  ethics.

We are living in a meta-digital, multi-reality world where perception of any reality is contextual. I agree with Professor Bhagwati that we Indians exaggerate our corruption. Although the Indian and western corruptions have different profiles, corruption in the west is far more entrenched and expansive as unraveled by Daily Telegraph’s account of fraudulent expenditure claims by British Parliamentarians. In the end, despite all the outrage, they could only find three Asian members to suspend. Nira Radia tapes pale into insignificance when compared with the clout lobbyists exercise in  both UK and USA.

Indian corruption is different. It is at the behest of politicians who need money to be elected. Current rate for an Assembly seat is Rs50 crores. Where would you find the astronomical sums to contest thousands of seats unless State funds the elections? So business and governments work hand in glove. India’s tragedy is that despite  having a Prime Minister of such unimpeachable integrity, corruption in India is raging like fire. We  have all the laws to curb it but no political will to enforce those laws. Even though our Companies Bill has been in the works for 7 years, we did pass a deterrent Competition Act 8 years ago. It has strict penalties for abuse of dominance and fixing prices. Yet there is no capture despite our supply chain being cartelized and despite cartelization being the biggest reason for food inflation.

The inequalities that threaten our businesses are the direct result of poor and opaque governance. Raghuram Rajan reiterates his fears about India’s oligarchic brand of capitalism saying “the ties that bind India’s billionaires to the state are too close for comfort”

I don’t think even Article 311 is an obstacle. I have myself served NIP (Notice of Imposition of Penalty) for removal of 13 Ticket Examiners in my capacity, many moons  ago,  as a Senior Commercial Superintendent of Eastern Railway. After all in any democratic system you have to go through a show cause process before snatching livelihood of any employee. Problem is when the chips are down, we tend to abdicate instead of effectively engage.  We keep looking for new laws as an excuse for inaction.

I agree with Mr Wolf that we need to have both “growth and other goods” but question is what kind of growth and what kind of goods? In what way production of unneeded goods that damage the environment and will choke our children would benefit us? Market realities have changed. Whatever made you successful in the past wont in future. Social & environmental agenda, climate change in particular, have become the biggest differentiator and driver of sustainable wealth. Oil at over $90 a barrel with fast depleting reserves simply cannot meet our exponential infra and energy needs. Renewables are the key to humanity’s survival. Companies and governments that fail to recognize this shall simply perish. Empowerment of people is the biggest growth area. Mark Zuckerberg has proved it with explosive growth of Facebook and by becoming Time’s person of the year at the age of 26. It is significant that the person trailing behind  Mark is Julian Assange whose Wikileaks is another device for empowering people that underscores the role of transparency.

The good news is that inclusive growth is achievable. All it needs is a trigger to spark a nationwide explosion of innovation. That trigger in India is vigorous enforcement of Competition Act 2002. Protecting and pampering incumbents drives out radicals and starves innovation.  History tells us that no technological break through was ever achieved by industry insiders. It is always an outside job.  Incumbents, having invested in old technology always use their clout to keep radicals out. Curbing abuse of dominance and punishing cartel conduct  opens the terrain for radical innovators to achieve the twin objective of offering new technologies at much lower costs and leveraging  bottom of the pyramid for inclusive growth.

 The issue is not so much of growth but sustainability. Sustainability is a process of Schumpeter’s creative destruction that needs to continually disrupt the status quo. In this world where change, turbulence and uncertainty are the only constants, harnessing turbulence through constant innovation is the only way to fulfill our youth’s global dreams . Innovation is not R&D and has little costs.  3M has shown how staff can be encouraged to innovate in their own time. All it needs is a culture of transparency that builds trust, removes fear of failure, enhances constructive engagement to confront clashing ideas through sustained dialogue.  

While investing our scarce resources we have to be careful not to go for absolutes but relevance. Driver of wealth today is not productivity but innovation, not perfection but difference, not education that puts degrees behind a name or teaches how to perfect the known or HNTGC – How Not To Get Caught (by regulators) – but education that opens our mind like parachutes to explore , innovate and imperfectly seize the unknown. We don’t need healthcare just to benefit hospitals, pharma companies and doctors. We need healthcare that reduces patients in hospitals through preventive action.

Systemic corruption is the biggest obstacle to all this. But it is not a virus carried by aliens from Mars; it is within each one of us. The only way to treat is through complete transparency. Transparency frightens wrong doers and acts as a disinfectant. It exposes the culture of concealment, conceit, cosiness, groupthink, self delusion and hypocrisy. Transparency can be far more effective than can be imagined to curb corruption in these days when social media has become  our 24 hour watchdog.

The choices we are discussing today determine the future of our children and their children. So these have to be evaluated dispassionately in a holistic way devoid of Groupthink (Irving Janis,1972). We cannot do it without taking into account the environmental and climate change concerns. Climate change offers the greatest opportunity for creative destruction. Why are we still driving cars that are only marginally different from Ford’s Model T? Why not think of cars that soak CO2 as you drive? Why not tax environmental capital to raise money? Imagine the astronomical opportunities of thinking innovation.

 Despite its messiness, our greatest advantage lies in our uniquely vibrant democracy. It  has helped us internalize the value of pluralism, capitalising diversity, dissent and dialogue. India has the distinction of effecting bloodless regime change overnight. Diversity has a priceless role in creating synergistic solutions in the age of uncertainty. When chips are down China is going to have severe problems  handling millions of voices of discontent not just its 100 million followers of Islam. To achieve growth that is sustainable, all we need is add disclosure to the other 4 Ds – disruption of status quo, celebration of diversity, valuing  dissent and dialogue. Innovation is fostered by Transparency, Engagement, Accountability and Responsibility (iTEAR).

 We need to remind ourselves  the words of our Father of  Nation about the  purpose of our effort: “Every action we contemplate should in its implementation wipe the tears of poor and downtrodden. Only when we have wiped the tears off the eyes of all the poor, have we truly arrived as a nation.”

Have a magical festive season and dream 2011