For raising prices abnormally the Government has come down on cement and steel companies. This reflects the distrust of market forces and reeks of the command and control regime. Indeed, both the sectors are riding a high demand curve, and therefore, also exploiting the situation.

On another note, the move to amend Indian Post Office Act, to provide monopoly to the Department of Posts over letters weighing less than 300 gm, is equally symptomatic of the Government's distrust of the market. With such signals, economic reforms and liberalisation process are under severe test.

There are other indicators too that highlight the `policy vacuum' in an era of economic reforms. It is, therefore, time the Government adopted a National Competition Policy as the mantra for implementing economic reforms (see "How to enhance growth and competitiveness," Business Line, April 12). The policy could spell out competition principles to guide the government for integrating a competition dimension in all public policies. What are these principles?

Free, fair market process
The first principle: The Government should `ensure free and fair market process'. However, as the examples above show, policies are most often designed in such a way that they stall the market process or promote the welfare of some market players. In the context of the Postal Amendment Bill, for instance, discussions have got skewed to providing DoP with a monopoly based on weight criterion instead of considering the fact that a segmentation already exists between ordinary mails and express.

The second principle requires the Government to `foster competitive neutrality', that is, through measures that ensure equal treatment to all market players, whether in private or public sector. In India, this principle is violated in both ways, that is, there are cases where government enterprises are given special advantages over their private counterparts (for example, the purchase preference policy that favours public sector). Similarly, there are instances, where public sector is disadvantaged vis-à-vis private competitors.

VAT: A big step forward
As per the third principle, the Government should `facilitate easy movement of goods, services and capital' by adopting rules and regulations so that trade and commerce within the country is free and unhindered. VAT is a big step forward towards a single market for the country. Another effort is that of the agriculture produce and marketing law, though its implementation, like VAT, is dependent upon the will of the States.

Sometimes, for reasons of technology or other public purposes, competition is neither desirable nor feasible. In such situations, the Government is required to `ensure third party access to essential facilities,' such as the creation of an access regime to an electricity transmission grid in order to create competition in the electricity sector. However, there are several cases where the access regime is thwarted by government actions. For instance, interconnection in telecom, in particular, to the state-owned BSNL network is a big problem. The Telecom Regulatory Authority of India has failed to ensure interconnection among service providers due to an ambiguity in the law. Consequently, growth in telecom services has been accompanied with an increase in inter-network congestion and poor quality of service. Over the years, the Government has set up sector regulators to `ensure a transparent, predictable and participatory regulatory environment'. However, most often, the government interferes in the functioning of the regulatory agencies in a manner that violates this principle. The power sector is a case in point, where continuous government intervention in regulatory decision-making has resulted in poor regulatory environment.

Related to this is the principle of `separation of policy-making, regulation and operation functions', which becomes imperative to avoid conflict of interests. Unfortunately, the temptation to command and control still prevails within line-ministries, often leading to turf wars, reflecting the state of immaturity of the regulatory framework in India. The Government's role as licensor, policy-maker and service provider in the telecom sector creates serious conflicts of interest.

IPR may have negative impact
Healthy competition encourages innovation. To provide incentives to innovate, firms are granted an exclusive right for a certain period for commercial exploitation. However, the existence and exercise of intellectual property rights (IPRs) may generate anti-competitive effects through the monopoly power granted to holders of these rights. In this context, the Government needs to `balance competition and IPRs' through appropriate policy and law. Accordingly, in several countries, abuse of IPRs is covered under competition law to ensure the required balance. However, in India, IPR laws such as the Copyright Act or the Trade Marks Registration Act have overriding powers over the Competition Act in matters related to IPR abuses. This is a huge gap in the law.

There are a few other principles too. But even if one looks at the examples given above, it shows that most often, the Government deviates from competition principles to protect `public interest' — an issue that is open to weird interpretations, and ultimately the policy ends up protecting some vested interest. It is important to `publicly notify and justify such deviations and implement them in a transparent manner'.

Often such policies have laudable objectives, but instruments used to achieve the objectives thwart the competitive process. In the case of education , subsidies need not be given to schools directly; rather students can be given vouchers, which schools should be able to cash. This would provide incentives to schools to improve quality and attract more students, in order to get more vouchers.

The above assessment of the state of adherence to the `competition principles' does not present a rosy picture for India. Violation of these principles exists in several measures adopted by the Government at all levels. It is imperative that the government (Centre as well as States) adopts these principles to complete and enhance the process of economic reforms. The goal of 10 per cent growth will then be within reach.

This article can also be viewed at URL: http://www.blonnet.com/2006/06/06/stories/2006060600361000.htm

Some possible solutions given that agriculture and Nama issues are stuck.

Why did India and Brazil not join the recent mini-ministerial of the WTO at Paris to move the stalled Doha agenda? For two reasons: first, they were frustrated with no progress, and second, their own realisation that the Geneva process was being suborned. Anyway, the mini-ministerial did take place with only the US, the EU, Japan and some other rich countries in attendance. What came out was also nothing to write home about. However, we cannot sit back but need to push a resolution sooner than later.

The main problem with the WTO negotiations is and always has been agriculture, and the fact that both the EU and US accuse each other for not offering enough. The latest EU offer is but to move about twenty yards. To make matters more interesting and to divert attention, the US threw a spanner in the works by asking the poor countries to curb their list of special products in addition to their earlier demand of lower farm goods tariffs. The poor countries responded with scorn.

The other spanner is further quid pro quo, that is, both rich countries are asking the poor for lower tariffs on industrial goods and opening up services. This is something which bugs many poor countries, because they feel that they have done enough during the Uruguay Round and its payback time. On services, there are some genuine and some far-fetched concerns against opening up on utilities, education and health sectors. Alas, perceptions are tragically often a reality.

Businesses in rich countries seem to have lost appetite on the Doha round, and are instead pressuring their governments to go through side deals through preferential trade agreements (PTAs). That is an increasingly pursued agenda by not only the rich but also the developing world, in spite of its pitfalls. The rich countries find it easier to get smaller countries to sign onto a PTA, and it does not matter to them that the multilateral agenda will collapse or seize.

On the multilateral agenda, it was agreed at Hong Kong that the offers and so on will have to be stated by all members by end-April. Following that, the modalities will have to be negotiated by end-June. We missed the April deadline, and now the agenda is to complete the whole exercise by end-June. Even that appears to be difficult, in spite of the WTO Director General Pascal Lamy’s caution that we have now entered a “red zone”. Nothing will move until the US and EU agree on farm goods, and that is becoming an increasingly difficult thing.

But, that is nothing new. It is, therefore, worth revisiting the contentious area of agriculture trade negotiations and how the international community has missed the bus on many occasions in the past. Though with some difficulty, agriculture was made a part of the “single undertaking” framework in the Uruguay Round. In fact, it was first seriously raised in the Kennedy Round (1963-67). Among other more complex issues, the EU suggested that it will take them 20 years to roll back all subsidies. None wanted to negotiate something with such a long timeframe. In hindsight, if there was an agreement in 1967, the problem would have disappeared by 1987, that is, 20 years ago!

We are most likely to face a similar situation, that is, after the numbers have been agreed, then the attention will turn to end dates. The good news is that there are internal budgetary pressures on the expanding EU and, thus, we can expect an end date in 2013, when the EU’s common agriculture policy comes up for review. How will the US behave is something one cannot speculate about. Their seriousness about the Round was evident in their changing the chief negotiator mid-stream, when Rob Portman was replaced by Susan Schwab.

So as India, what do we do now? We are also following the fashionable non-multilateral route of tying up deals with countries in the east, and also mulling about similar bilateral deals with the EU, among others. But, that too is coming under fire from many important politicians. The best way forward is the WTO route, and for that we need to do some imaginative thinking.

First, call for a temporary moratorium on non-multilateral deals until the Doha Round is sorted out. Second, hand over the baton to Pascal Lamy to design a final draft under the guidance of a representative group of negotiators and a group of eminent persons, such as Ernesto Zedillo; Kofi Annan; Peter Sutherland and Jagdish Bhagwati.

Third, as Plan B, since the fundamental issues of agriculture, non-agricultural market access (NAMA) and services cannot be settled in the meantime, WTO members should consider what can be agreed upon. The controversial issues can be left on the back-burner until the US and EU sort out their political situation that may take a few years. It is time to turn the Hong Kong declaration on its head and straighten out negotiations in other areas, such as WTO rules, TRIPs, trade and the environment, aid for trade and the Integrated Framework, all of which are crucial for developing countries and have been unaddressed during negotiations.

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http://www.business-standard.com/opinionanalysis/storypage.php?tab=r&autono=93628&subLeft=2&leftnm=4

Read the view on this article...

Home to one-third of the world’s population, India and China adopted similar development strategies prior to adopting a market economy. While China’s first steps were taken in 1970s, India’s piecemeal reforms were launched in early 1980s. The 1990s saw an acceleration in these reforms due to the arrival of the WTO in 1995. While India was a founding member of the WTO, China made hectic efforts to join it in 2001. Today, both the countries are the cynosure of all eyes in the world: China has become the factory of the world due to cheap manufactures, and India performing the back office role for the rich world. As a result, there is increasing heat from rich countries, stoked by protectionist forces. Nevertheless, both China and India see synergies in the IT sector i.e., Chinese hardware offering a partnership to Indian software.

The possibility of such a relationship extends to hundreds of others goods being made by either country. No wonder then that bilateral trade between India and China has grown a huge amount just in the last decade: from $1 billion to $18.7 billion. Commerce minister Kamal Nath believes that this will double by the end of this decade.

Together, the two countries seem set to consign the ghost of 1962 to the dustbin, and follow Deng Xiaoping’s advice: “Intractable issues should be kept aside and progress should be made on other fronts”. Such a regional peace can transcend into better trade and economic ties, from which both India and China can gain. Such gains generate the confidence and trust to tackle global issues as well. The WTO is another platform where both China and India, along with several other countries, are pushing an agenda to reform the distorted agriculture subsidy regime in the rich countries. The agenda is not moving, but the alliance is also not weakening.

China and India (or Chindia, as some commentators will have it) will continue to plod in a partnership mode through both bilateral and multilateral issues and third country settings. Such a partnership will be based on a healthy mix of complementarity, competition and some amount of conflict as well. Competition in the area of tradeables is likely to heat up. This can be in the area of manufactures, where India is slowly moving up. In the context of WTO, both are being targeted with non-tariff barriers, such as labour standards. This is one area, where both can dig their heels in at the WTO to stop the same being mainstreamed, as environment has already been done.

One area of conflict arises here, when numbers show that India is now a major user of anti-dumping provisions, while China is facing majority of antidumping actions. This will require some attention by India’s policy makers to see that it doesn’t cause harm to our closer economic cooperative agenda.

The WTO is one example of complementarity. For China, it does not matter if it has to maintain a low profile, even if India (along with Brazil) is at the vanguard of the G-20 alliance at the WTO. The balance of power is shifting. On the other hand, it is just not the rich countries driving the global economy. China and India are now also in the same league. This has some reverberations in international policy making circles, such as in the IMF. Discussions are on to change the voting powers to reflect the new politic; how quickly this will happen is not known, but it will happen sooner than later.

Growing economies need a larger amount of energy than before. This is another area where both China and India have adopted a cooperation mode. In the area of oil, since 2004, Indian firms had faced competition from Chinese firms. In three cases, Indian firms were outbid by their Chinese counterparts: Angola, Kazakhstan and Equador. The first cooperative venture succeeded in Syria, and more are likely to follow. Wisdom has prevailed over myopia.

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