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Wednesday, March 21, 2007

Competition policy and privatisation policy

My column in Business Standard today is titled Competition policy > privatisation policy. I argue that while privatisation is the first best strategy, in a time when there are political constraints impeding privatisation, it is very important to not cut corners on competition policy. The most powerful tool for making progress on economic policy is bringing in the maximal domestic and foreign competition. There is a lot to do on competition policy which is politically feasible today, without waiting for the next general elections.

I think it is useful to put together a nuanced picture combining privatisation and competition. In the backdrop, privatisation is about obtaining GDP growth through improved productivity of labour and capital [link]. But more importantly, privatisation is a valuable means to heightened competition insofar as it helps us attain a government which is not conflicted [link] in achieving sound competition policy. But going beyond privatisation, it is also possible for men and agencies to rise above these conflicts of interest and push the competition agenda - as has happened with the best of policy makers in India in the last 20 years.

I highlight the Indian experience with mutual funds, telecom and airlines - each of which has benefited from the best of policy makers. In each of these areas, the single most important event was removal of entry barriers. In the case of international long distance, the removal of entry barriers was supported and enabled by the privatisation of VSNL. Today, the privatisation of UTI, MTNL, BSNL and the merged airline would be excellent achievements, but these privatisation events are no longer the key milestones for progress. The genie of competition and growth is out of the bottle, and this was achieved by competition policy, not privatisation policy.

The most disappointing thing about Indian banking is not the lack of privatisation. This is a decision made by Parliament, and until enough MPs are persuaded, there will be no progress on that score. In contrast, competition policy in banking is something that RBI controls, and there is no political bias in favour of impeding competition. The present state of affairs, with high entry barriers, branch licensing, and a near-ban on branch expansion by foreign banks: this adds up to a dismal state of affairs in terms of competition.


  1. as you point out the govt will sell the psu when their prices will be at the lowest. i believe the competition policy is akin to a wealth transfer from the govt to the sharholders of the companies who choose to compete with the govt. it can be quite tricky to figure out in which of these cases aggregate welfare is increasing. even though the tax structure in India is turnip-shaped, it is possible that privatising certain monopolies hurts society on the whole esp in cases of manufacturing industries whose labour is geographically concentrated.

  2. I agree with you on the principle , but I have some points which keeps looming ..
    (1) Don't you think that ther is uregnt need inorder to foster the growth in particular sector , the respective sector must have proper rules, regulation , and guidlines in place... the best example I feel is Mutual fund industry in India
    (2) The best example of regulation and foster of growth is Europe, we must learn from them...
    the way they handled Aerclor Mittal Merger was great from the business point view but also from the policy point of view, the problem with Indian policy is that its has to be way ahead in terms of dynamics of business, we should not restrict froce which will curtialed Indian consumer needs so that the end users in India will be able to take advantage on price,quality and serives point of view, the competition and monopoly issue in a particular only has to adress by the goverment with necessay rules and regulation for fair and competative business enviroment
    (3)Lets not forget that India has vast pool of manpower lets not waste its porductivity, but here due to lack of political will and scattered growth in our reagion exaple I will give, people from the far north east and, bihar ,orissa migarte to other region for jobs etc (labours), some time i wonder a time 25% of India is growing at pace which even developed nation are unable to attain but we still see reagion in Bihar, orissa and far east where there also psedo face of growth also casting its shadow, please what u have that in SEZ i wonder whether that will be address, not just sake of that china has implemented that succes formulea we can copy that succes lets see only time will tell that..


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