State Government Policies and Competition Presentation made to the Planning Commission Working Group on Competition Policy Pradeep S Mehta Secretary General, CUTS International 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 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) State Government Policies

6 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) State Government Policies

7 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 State Government Policies

8 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 State Government Policies: Other Examples

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