State Government Policies and Competition

1. State Government Policies and Competition Presentation made to the Planning Commission Working Group on Competition Policy Pradeep S Mehta Secretary General, CUTS International sg-cuts@cuts.org; psm@cuts.org www.cuts-international.org 28 July 2006

2. Background • Liberalisation and economic reforms has reduced the degree of control exercised by the central government in many areas, leaving much greater scope for state-level initiatives • State-level policies and practices deserve much closer attention • Are there policies/practices of state governments that result in anti-competitive outcomes?

3. State Government Policies Policies to Attract Investment: • Packages put out for industrial promotion, wherein incentives like sales tax holiday, electricity duty waiver, etc. given • Examples of state governments adopting terms and conditions that are anti-competitive • Several states have decided to grant iron ore mining rights only if steel plant established in their respective states • Tying a mine only to local state industries discriminatory and against steel makers in other states

4. State Government Policies Preferential Treatment in Procurement: • Preference (price / purchase) given to local units • Policy may be desirable in the context of, the overall development policy of the state BUT • Undue protection breeds cartelisation (barbed wire association in Rajasthan) • Incapacity of state government, results in anti-competitive outcomes (millers’ cartel in Orissa)

5. State Government Policies Bid Rigging in Construction/Works: • During the last 5 years, all state governments have spent approx US$300bn on civil works • Works awarded through competitive bidding BUT • Contracts awarded in bigger packages; limiting competition • Contractors collude to form a pool (flyover scam in Chennai)

6. State Government Policies State Excise Policy for Liquor: • Various systems adopted for distribution and marketing of liquor (auction or licensing) • Policy largely revenue oriented • Cartelisation in states where wholesale/retail trade granted by tender-cum-auction system (liquor mafia) • Bids suppressed and state revenues decline (Rajasthan)

7. State Government Policies Movement of Goods and Services: • Implementation of VAT a big step forward towards a single market BUT • Governments (centre as well as states) continue to impose restrictions on trade and commerce through regulations in various forms • Transportation and transaction costs increase, that increase final cost of products

8. State Government Policies: Other Examples • Agricultural Produce Market Regulation Act: monopoly to state governments, loss to farmers • State-owned transport corporations given monopoly on profitable routes, particularly inter-state • Open Access in Electricity: a non-starter • Rajcomp in Rajasthan: monopoly in providing IT services to government agencies • Maharashtra Cotton Monopoly Procurement Policy • Cartelisation of cargo operators; cartelised operation of truckers’ union

9. Regulatory Failure at local level: Examples • School Education: • Tied sales in books, uniform, and stationery • Health Services: • Nexus between doctors, pharma companies, chemists, as well as diagnostic clinics • Cable TV: • Local cable operators increase subscription rates at will • Enforcement of TRAI’s Orders difficult • TRAI has called for strengthening local level enforcement mechanism

10. Conclusion • Market distortions rampant at state level • State governments need to rationalise their role vis-à-vis market forces • By promoting competition and effective regulation, state governments can protect consumer interest as well as increase their own revenues • Need for state governments to benchmark their policies and practices as per competition principles • Need to establish a credible regulatory framework at local level for better enforcement of regulations