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CUTS� Competition Impact Assessment Toolkit � iii

CUTS� Competition Impact Assessment ToolkitA Framework to Assess Competition

Distortions Induced by Government Policiesin the Developing World

CUTS� Competition Impact Assessment ToolkitA Framework to Assess CompetitionDistortions Induced by Government Policiesin the Developing World

Published by:CUTS International

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Citation:Mehta, Pradeep S. (2014) CUTS� Competition Impact Assessment Toolkit: A Framework to AssessCompetitionDistortions InducedbyGovernmentPolicies in theDevelopingWorld, CUTSCCIER, Jaipur

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© CUTS, 2014

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Contents

Abbreviations ............................................................................................................................................... i

1. Introduction ........................................................................................................................................... 1

2. Instruments for Effective Competition .................................................................................................. 5

3. CompetitionDistortions inGovernment Policies .................................................................................. 7

4. The Assessment Framework ....................................................................................................... ........ 15

Annexure A: CompetitionAnalysis ofMarkets ....................................................................................... 31

Annexure B: Application of Competition Principles vis-à-visthe Pharmaceutical Sector in India .................................................................................. 35

List of BoxesBox 1: Vignettes onBenefits of Competition inDeveloping Countries .................................................... 3Box 2: Lessons fromAustralia ............................................................................................................... 11Box 3: CCI�s Advocacy on Banking Sector ............................................................................................. 15Box 4: Public Sector Vaccine Units Closed ............................................................................................ 15Box 5: Ministries Spar over Entry of Private Players........................................................................... 16Box 6: Unfair Condition Acts as a Barrier ............................................................................................ 17Box 7: NTB to protect domestic firm from foreign competition ............................................................. 17Box 8: The �grandfather� rule ................................................................................................................. 18Box 9: Entry Barrier for Private Players .............................................................................................. 19Box 10: Parallel Imports .......................................................................................................................... 19Box 11: Government Direct PSU Banks to OpenMore Branches in NE states ..................................... 19Box 12: Entry Tax Act Sparks Legal Battle ............................................................................................ 21Box 13: Growth of Public Sector in India ................................................................................................ 21Box 14: Exclusive Rights to Public Sector Companies ............................................................................ 22Box 15: CONCORAbusingDominant Position ....................................................................................... 22Box 16: Supply Licence ............................................................................................................................ 22Box 17: Compulsory Licensing ................................................................................................................. 23Box 18: Failure of Regulatory Environment in the Absence of a Legal Framework .............................. 24Box 19: Violation of Principles of �CompetitiveNeutrality ...................................................................... 24Box 20: NewExcise Policy Evokes Good Response .................................................................................. 26Box 21: Governments SometimesBenefit fromUncompetitive Situations .............................................. 26Box 22: Australia's Competition Principles Agreement ........................................................................... 28

Figure 1: Competition Policy vis-à-visCompetition Law .......................................................................... 5Figure 2: Invisible Hand, Visible Results .................................................................................................. 8

CUTS� Competition Impact Assessment Toolkit �� i

Abbreviations

AIOCD All India Organisation of Chemists andDruggistsAPMC Agricultural ProduceMarketing Committee

BRE Better RegulationExecutiveBSNL Bharat Sanchar Nigam Ltd

CCI CompetitionCommission of IndiaCERC Central Electricity Regulatory CommissionCIRC CUTS Institute for Regulation&CompetitionCONCOR Container Corporation of India

DFID Department for InternationalDevelopmentDoT Department of Telecommunications

ECJ EuropeanCourt of JusticeEU EuropeanUnion

FDI ForeignDirect InvestmentFRAND Fair, Reasonable andNon-Discriminatory

GMPs GoodManufacturing Practices

HHI Herfindahl Hirschman Index

IAs ImpactAssessmentsICDs InlandContainerDepotsIPR Intellectual Property RightM&As Mergers &AcquisitionsMoHFW Ministry of Health and FamilyWelfareMRTPA Monopolies &Restrictive Trade Practices ActMTNL Mahanagar TelephoneNigamLtd.

NCP National Competition PolicyNPPP National Pharmaceutical Pricing PolicyNTBs Non-tariff Barriers

ii � CUTS� Competition Impact Assessment Toolkit

OECD Organisation for Economic Cooperation andDevelopment

PSU Public Sector Undertaking

R&D Research andDevelopmentRBI Reserve Bank of IndiaRIAs Regulatory Impact AssessmentsRSBCL Rajasthan State Beverages Corporation Ltd.

SAWTEE South AsiaWatch on Trade, Economics & EnvironmentSoEs State-ownedEnterprisesSSNIP Small but Significant Non Transitory Increase in Price

TRIPs Trade-Related Aspects of Intellectual Property Rights

USO Universal Service Obligation

WHO WorldHealth OrganisationWTO World Trade Organisation

ZCC ZambiaCompetitionCommission

CUTS� Competition Impact Assessment Toolkit � 1

Althoughagreat amount of empirical and theoretical literature onthebenefitsofcompetitionexiststoday,skepticshaveexpresseddoubtsinthepastaboutwhethercompetitionasapolicywouldworkwell fordevelopingcountries.OnesuchviewhasbeenexpressedbyaneminenteconomistJean-JacqueLaffontas:�Competitionisanunambiguouslygoodthing in the first-bestworldofeconomists.Thatworldassumeslarge numbers of participants in allmarkets, no public goods, noexternalities, no informationasymmetries, nonaturalmonopolies,completemarkets, fullyrationaleconomicagents,abenevolentcourtsystemtoenforcecontracts,andabenevolentgovernmentprovidinglumpsumtransfers toachieveanydesirableredistribution.Becausedeveloping countriesare so far fromthis idealworld, it isnotalwaysthe case that competition should be encouraged in these countries.�(italicsadded).1

Laffontsuggeststhatevenifcompetitionpolicyofthekindfollowedbyadvanced countries, suchas theUSor theUKwereappropriate forpoorAfricancountries, theyseverely lack the institutional capacityto implementsuchpolicies.The implementationofacomprehensivecompetition policy requires a strong statewhichmanydevelopingcountriesat lowlevelsof industrialisationdonothaveandsoclearlyit would be unfair, if not absurd, to subject a Burkina Faso to thesamecompetitionpolicydisciplinesastheUK.He,therefore,suggeststhatthesecountriesturnto industrialpolicyassecondbestsolutions.

Similarly, other arguments in favour of this view voice thatdevelopmentdependsprimarilyoninvestmentandthatinvestmentismorelikelyiffirmsmakesubstantialprofitswhichcouldbeendangeredif competition ismaximised. Inaddition to this,manyhavestronglyarguedthat implementationofcompetitionpolicyandlawshouldnotbe given priority in light of other existing pressing social concernsprevalent in thesecountries.And if theywere todoso, it shouldonlyberestrictedtocurbingcartelconductandnotincludemergerreviewsandabuseofdominancematterswhicharebestlefttothemorematureanddevelopedeconomies.

On the contrary, there is enough evidence to suggest that infusingcompetition inmarkets is essential if thesemarketsareexpected towork for the poor. Inmany developing and developed countries,provisionof servicesandproductionof essential goods ishandledby

Chapter 1

Introduction

The implementation of acomprehensive competition

policy requires a strongstate which many

developing countries at lowlevels of industrialisationdo not have and so clearlyit would be unfair, if not

absurd, to subject aBurkina Faso to the same

competition policydisciplines as the UK

There is enough evidence tosuggest that infusing

competition in markets isessential if these marketsare expected to work for

the poor

2 � CUTS� Competition Impact Assessment Toolkit

private firms often in concentratedmarkets. This accentuates theneedforafunctionalcompetitionregime,toensurethatthesefirmsdonotengageinanticompetitivepracticestothedetrimentofconsumersorevensmallsuppliers.The2001NobelPrizewinnerJosephStiglitzsaid: �Strong competitionpolicy isnot justa luxury tobeenjoyedbyrich countries, but a real necessity for those striving to createdemocraticmarketeconomies�.

Overthepastyears,thebeneficialoutcomesofinterventionsbydomesticcompetitionagenciesof countrieshavetoa largeextentsucceeded indispellingthemyththatcompetitionpolicyandlawis fortherichandtheaffluentonly.

SpeakingforalesserdevelopedcountrylikeNepal,RatnakarAdhikariofSouthAsiaWatchonTrade,Economics&Environment(SAWTEE),Nepal said, �Small countries could rely, to some extent, on theinstitutionalmechanisms of their large trading partners to tacklecompetitionconcernsinvolvingforeigncompanies,however,nationalcompetitionpolicywouldstill beuseful todealwithanticompetitivepractices inretailingandothernon-tradedservicesectors.�2

Competitioniscrucial ifmarketsaretoworkwell forthepoorbecausethey ensure efficient productionanddistribution. Ina2007 study,3theWorldBankconcludedthat theworld�spoorest countries tendtohavelowlevelsofcompetitionindomesticmarketsandahighdegreeofmarketdominance.

In a 2008 study, Brusick and Evenett observed that because ofunderdeveloped infrastructures, the competitiveness of domesticmarkets of developing countries is limited.This is oneof the factorscalling for the need of competition policy and law to address thesedeficiencies.4

AnOrganisationforEconomicCooperationandDevelopment(OECD)reportsaysthatfirmsandsectorsarefarmorelikelytobecompetitiveinternationally if theyoperatewithincompetitivedomesticmarkets.5

Competition is also important for the effectiveness of governmentprocurementwhichhasadirectbearingonsocialgains (forexample,in theprovisionof rural infrastructure),asanticompetitivepracticesbysupplierscanreducewhatgovernmentscanachievewiththelimitedfundsavailable,whichif freedup,canbeutilisedtowardsothersocialinfrastructure.Competitivemarketsarealsomore likely toprovidethepoorwithneweropportunitiesforemployment(whenthecompetitivespirit inthemarketstimulatesentrepreneurshipandalsocurbsentrybarriers inkeymarkers).

The 2001 Nobel Prizewinner Joseph Stiglitz

said: �Strong competitionpolicy is not just a luxury

to be enjoyed by richcountries, but a real

necessity for those strivingto create democraticmarket economies�

Without an effectivecompetition regime in

place, the lesser developedcountries are much morevulnerable to the cross-

border impacts ofanticompetitive practices


Furthermore,withoutaneffective competition regime inplace, thelesser developed countries aremuchmore vulnerable to the cross-borderimpactsofanticompetitivepractices.Thegrowingtradereformsandeconomic liberalisationneed tobeaccompaniedbyaneffectivecompetitionregime.Evenettarguesthathavingacompetitionregimecouldmake countriesmoreattractive for foreigndirect investment(FDI).6 The2005Report of theCommission forAfrica identified therole played by an effective competition policy in attracting foreigninvestmentsbycreatingagoodandtransparentbusinessenvironmentthatboosts investorconfidence.7

KeeandHoekman(2003)8 found inastudythat therewasapossiblerelevantside-effectof competition lawsuchthat industriessubject tocompetition lawhadalargernumberofactive firms implyingeaseofentry. Since entry ismade easier, the studywent a step further toassesswhether it explainedchanges in thecorruption levels since itmakeslittlesensethentobribeofficials forashareof themarket.Theabovediscussion, therefore, leaves little doubt about theneed for afunctionalcompetitionregimeindeveloping/leastdevelopedcountries.It isonlythedesignofthenationalcompetitionregimewhichseemstobeamatterofdebate.

Thereisenoughevidencetoshowthatthedevelopingworldalsoneedstopromoteacompetitionculturethroughappropriatepoliciesandlaws,whichwouldhelp its owngrowthanddevelopment.Onecannotaskpoorcountriestorelyonindustrialpolicyalone,becauseacompetitionpolicyistheothersideofthecoin.However,developmentofinstitutionsin thedevelopingworld isnotaseasyas in the richworld.Secondly,

Box 1: Vignettes on Benefits ofCompetition in Developing Countries

A. In India, the effect of competition on price and accessibility isbest illustrated by the case of telecommunications with tele-density increasing from amere 2.32 percent in 1999 to 47.89percent in December 2009 and tariffs falling from M16 to lessthan M1 per minute. Moreover, such intense competitionamongst various service providers has resulted in improvementin availability though quality of service is not as good.

B. In Zambia, twomultinationals (Dunavat andCargill Cotton)weredominating themarket with aCR2 of 83.49 percent and abusedthe outgrower schemeby charging high input prices and payinga low final price. In 2005, the Zambia Competition Commission(ZCC) intervened in thematter. Before ZCC�s intervention, theywere charging the input prices at ZK40,000 per pack. Whileinvestigations were still underway, Dunavat indicated that theywere now reducing input prices to ZK36,000. Cargill alsodecreased input price for the 2006 season by 28 percent.According to Cargill�s estimates, the changes gave an averagefarmer an additional net income increment of 75 percentcompared to the previous year.9

There is enough evidence toshow that the developing

world also needs topromote a competition

culture throughappropriate policies and

laws, which would help itsown growth and

development


C. Mauritius had to rely on powdered milk to meet their and theirchildren�s nutritional demand as fresh milk was unavailable inthe country prior to 2006. The powdered milk market wasdominated by a handful of players one of whom decided toraise the price of the product enjoying a profit margin of nearly41 percent. Awareness and interventions regarding theanticompetitive practices on consumers� daily lives by the civilsociety organisations led to the government eventuallyintervening and fixing the margin of profit for the sector at 14percent leading to a substantial decrease in price.10

D. In Bhutan, the government requested Hindustan Lever Ltd.(renamed as Hindustan Unilever Ltd.) an Indian company toappoint more than one distributor, but the company declined.Bhutanese government which had no jurisdiction on HLL thenpassed a regulation to stop local traders in Bhutan to beexclusive agents for any foreign company. HLLwas forced toappoint Food Corporation of Bhutan as the second distributor,which had a depot in all the 75 districts. Consequently, HLL�ssales went up three times, and consumers in Bhutan were notdependent upon one private company which did not servicethe entire country properly.

E. In a study, Clarke andEvenett11 found that therewere significantreductions in overcharges on vitamins by the associated carteldue to anti-cartel laws in the 1990s. In Zambia, the averageannual reduction in overcharges was about US$10,000 whilethe reductions were about US$20,000, US$180,000 andUS$9.91mn inTanzania, Kenya and SouthAfrica respectively.

F. Immediately post the implementation of the Tanzanian FairCompetitionAct in 1994, it was noted that markets with five ormore incumbent firms achieved increases in productivity levelsof between 13 and 24 percent.12

laws cannotbe copied fromthedevelopedworld, as one size or stylewill not fit all. Developing countries will have to adopt laws andimplementationagenciesbydesigningandadoptingthemtothelocalcontextandbyprovidinghumanand financial resourceswhich canbegarnered.


Chapter 2

Instruments forEffective Competition

Competitionpolicyandlawarethetwomaininstrumentsthatensurethattheoutcomesanticipatedfromcompetitionareoptimallyrealised.Unfortunately,mostof thepolicycommunityconsiderthesetermsassynonymousandinterchangeable.However,theyarecomplementaryyetdistinct concepts (refer toBox1).

Competitionlawistheframeworkofrulesandregulationsdesignedtofosteracompetitiveenvironment(i.e.,promotecompetition)andcurbanticompetitivemarket practices. A large number of developingcountrieshaveenactedacompetitionlaw13 thatregularlychecksandseeks torectifyanticompetitivebehaviourofenterprises, statutorilythrough the implementation of its legislative provisions that aredesignedtoattackbehavioursuchascartelisation,price-fixing,abuseofdominantposition,anticompetitivemergersandtakeoversthatcauseor have the potential to cause an appreciable adverse effect oncompetition in themarket.Whilestillmaturing, there isasysteminplace to acknowledge and address such practices that thwartcompetitionandchallengetheeconomicgrowthof thecountry.

Source: CUTS, 2007

Figure 1: Competition Policy vis-à-vis Competition Law

Competition law is theframework of rules andregulations designed to

foster a competitiveenvironment and curb

anticompetitive marketpractices


Contrarytothis,challengingthedistortionsandimpedimentsinducedbygovernmenterected institutionalbarriers to competition isnotasimpleapplicationoftheexistingdomesticlaws,andinmostdevelopingcountries fallsbeyondthe jurisdictionof thecompetitionauthority. Itis a competitionpolicy that, besides encompassing the competitionlawcanalsodealwithanticompetitivedimensions inherent insomegovernmentpoliciesand/ortheanticompetitiveoutcomesofthemannerinwhichmanyofthemareimplemented.Italsotriestobringharmonyinallgovernmentpoliciesthataffectcompetitionandconsumerwelfare.

Experience shows that the ideal process of evolving a nationalcompetitionregimeisforanationalcompetitionlawtobeprecededbyanational competitionpolicy.Thismethodologyhasalso started tofindacceptanceindevelopingcountries.OneofthemworthmentioningisBotswana,whichfirstembarkedonaneconomicmappingstudytoidentify thepolicyareasof concern fromacompetitionpointof view;thiswas followedbyaninventorisationof legislations thatneededtobe synchronisedwith the competition policy. Finally, the countrydevelopedaNationalCompetitionPolicy(NCP)in2005.Subsequently,theCompetitionLawofBotswanawasadoptedin2009andiscurrentlybeing implementedby theCompetitionAuthority ofBotswana.14Afew other countries have chosen similar paths like Malawi,Mozambique,Ghana,etc.

Australiaadoptedacompetitionpolicymuchafteritscompetitionlaw,whenitwasdiscoveredthattherearemanypolicy-induceddistortionswhich cannot be tackledby the law.ThePolicywasadoptedafter adetailedreviewaspartoftherecommendationscontainedintheHilmerReport,15 1993, and agreed to by theFederalGovernment and thestate governments. It has since been implementedby theNationalCompetitionCouncil.

FollowingtheAustralianexperience, IndiapreparedadraftNCPin2011andisexpectedtobeadoptedsoon.Thecountryenactedamoderncompetition law in2002 replacing theoldMonopolies&RestrictiveTrade Practices Act (MRTPA), 1969. The new law is underimplementationsince2009.Australiahadacompetitionlawsince1974,butitscompetitionpolicywasadoptedin1995.InthecaseofAustralia,theeconomygainedby5.5percentoncethecompetitionreformswerecarried out.Further, a �Reviewof theNCPReforms� undertaken in2005 found that thebenefits of these reforms touched the lives of itscitizens fromdifferent economic classes, andacrossbothurbanandrural areas in the country.16

Following the preparation of the NCP in India, the Ministry ofCorporateAffairsandtheCUTSInstituteforRegulation&Competition(CIRC)carriedoutsnapshotstudiesin13subjectandsomecrosscuttingsectorsin2012toanalysethetypesofcompetitionimpedimentswhichprevailed in themarketplace.17

It is a competition policythat, besides

encompassing thecompetition law can alsodeal with anticompetitivedimensions inherent in

some government policiesand/or the anticompetitiveoutcomes of the manner inwhich many of them are

implemented

Following the preparationof the NCP in India, theMinistry of CorporateAffairs and the CUTS

Institute for Regulation &Competition carried outsnapshot studies in 13subject and some cross

cutting sectors in 2012 toanalyse the types of

competition impedimentswhich prevailed in the

market place


Chapter 3

Competition Distortionsin Government Policies

Effectivecompetition isoneof thecritical instruments for increasingeconomic growth through enhanced innovation, efficiency andproductivity as well as ensuring social gains by overall povertyreduction and greater consumerwelfare. In his book, thePower ofProductivity,18WilliamLewisarguesthat if countrieseliminatedthepoliciesthatdistortcompetition,theycouldgrowrapidly.Competitioncanbedistortedbothbyanticompetitivepracticesofenterprisesandbypoliciesandregulationsofnational, stateand local governmentsthathaveanticompetitiveoutcomesasanunintendedconsequence.

In theory (which is often far from reality), thewelfare optimum isachieved inperfectly competitivemarketswhereprices are close tothe cost of productionandnosingle companyhas influenceover theprices.Suchmarketsare fully transparentandhavea largenumberof sellersandbuyerswhopossessperfect informationregarding theproductsandservices.19

What is Competition Distortion?Competitiondistortiondenotesasituationinwhichcompaniesarenotcompetingunderequalconditionsposedbyseveralfactorscharacterisedby the anticompetitive practices of firms and some competition-distortinggovernmentpolicies, regulationsandpraxis.

Lewisalsosaysthatoneofthemainobstaclestoeconomicgrowthandpovertyreduction inmanycountries is thereasonthatmanypoliciesdistort competition. Indiaoffersagoodexampleof this,hewrites.Heargues thatwhen India abandonedmany of the limits on foreigninvestment in the country�s automotive industry during the early1990s,subsequently,pricesfell,demandforcarsexploded,andoutputnearlyquadrupledasseenbelow.20

Not only that, India started exporting automobiles which wasunimaginableinthepre-reformperiod.Thecompetitionusheredinbyallowingseveralforeignmanufacturersalsohelpedboostthedomesticauto components industry, and two of India�s big business houses:TatasandMahindrasstartedmanufacturingandexportingvehicleswiththeirowndesign.

Competition can bedistorted both by

anticompetitive practicesof enterprises and by

policies and regulations ofnational, state and localgovernments that have

anticompetitive outcomesas an unintended

consequence

One of the main obstaclesto economic growth and

poverty reduction in manycountries is the reason

that many policies distortcompetition


How is Competition Distorted?Anticompetitivepracticesby firmsareonecause foralteringmarketconditions. Inappropriateregulationsandpoliciesbynational, stateandlocalgovernmentsleadingtoanticompetitivemarketoutcomesistheothercauseofmarketdistortion.Furthermore,whengovernmentpolicies limit competition, even unintentionally, more efficientcompaniescannotreplacelessefficientones, therebyhavingnegativeimplications for growth. In the Eleventh Five Year Plan PolicyDocument21 on InclusiveGrowth (paragraph11.29), thePlanningCommissionhasmentioned that thereare several existingpolicies,statutesandregulationsofthegovernmentthatrestrictorunderminecompetitionandhencereviewofsuchpolicies,statutesandregulationsfromthecompetitionperspectiveneedstobeundertaken.

Challenges Posed by Government Policy-induced Competition DistortionsThe design and operation of several policies and practices of thegovernment are such that they distort the market process andcompetition, usually in the name of public interest often whichinvariablymeanssomeentrenched/vestedinterests.22Thedistortionscausedbygovernmentpolicies/practicestothemarketprocessmaybebroadlygroupedandclassifiedasthoserelatingto(thoughnotlimitedto)trade,procurement,financial,industrial,transportandfiscalpolicy.

Amajordifficultyposedbydistortionsofsuchnatureemanates fromthe fact that inmost government policies, such as trade remedialmeasures,othertradepolicyinstruments,procurementpolicies,pricingpoliciesandothersthathavetheeffectofweakeningcompetition, thedistortivecomponentisaccompaniedwithsignificantpolicyobjectivesand justifications. Such justificationsmaywell benecessary in thelargerpublicinterestorfortheachievementofsocialandenvironmentalobjectives. However, such justifications/assumptions cannot be

Figure 2: Invisible Hand, Visible ResultsThe Planning Commissionhas mentioned that there

are several existingpolicies, statutes and

regulations of thegovernment that restrict orundermine competition and

hence review from thecompetition perspectiveneeds to be undertaken

The distortions caused bygovernment policies/

practices to the marketprocess may be broadly

grouped and classified asthose relating to trade,procurement, financial,

industrial, transport andfiscal policy


presumedandneedtobetransparentlyandclearlycommunicatedforan informeddebate before adecision is reached.This is seldomthecase.

Itissometimesalsoseenthatevenwhenthegovernmentiscommittedto introducing competitionbasedmarketprinciples, the outcome isgenerallytheoppositemainlybecauseof futileandignoranteffortstoreconcile toomany conflicting objectives.23Multiple objectives alsoresult in limitingtheaccountabilityofgovernments.

AsecondchallengeposedbysuchpoliciesisthatthereisnomechanismintheexistingeconomicgovernanceregimeofIndiathatensuresthatpoliciesareformulatedinamannerthattheiranticompetitiveoutcomesareminimisedandtheyare leastcompetitionrestrictive.

InUKeverynew lawhas to carryaRegulatory ImpactAssessment(RIA).BetterregulationhasbeenfocustheresincetheestablishmentofanadvisoryBetterRegulationTaskForce in1997.The2005reportby the thenBetterRegulationTaskForce inUKarticulated the �fiveprinciplesforbetterregulation�as:(i)proportionality;(ii)accountability;(iii) consistency; (iv) transparency;and(v)necessity.ThesefiveBetterRegulation principles have been incorporated in Legislative andRegulatoryReformAct2006.

In2006,apermanentbodycalledtheBetterRegulationCommissionwasestablished. Thus,intheUK, RIAshavebeenakeytoolinhelpingimprove the quality of regulation. RIAs have been produced bygovernmentdepartmentsformanyyearsusingguidanceproducedbytheBetterRegulationExecutive(BRE).InMay2007,anewsystemofImpactAssessments(IAs)wasintroducedandmadefullyoperationalinNovember2007.TheDepartmentforBusiness,Innovation&Skillsis inchargeof theprocessof implementationof thisnewsystem,andisparticularly cognisantofprotecting thecompetitiveprocess in themarket andpreserving the interest of consumers, aswell. In India,CUTS ispushing theagenda to incorporate impact assessments inlaw making and review process through its projects entitled�FacilitatingtheAdoptionofRegulatoryImpactAssessmentFrameworkin India� and �Regulatory ImpactAssessment in IndianElectricityGenerationSector� respectively.

Political Economy Factors Causing DistortionsPoliticaleconomyfactorsplayahugerolehereespeciallyindevelopingcountries. In the theory of political economy developed by AnneKrueger24 andGordon Tullock,25 the authors argue that inmanymarket-oriented economies, especially developing, governmentalrestrictionsuponeconomicactivityarepervasive facts of life.Theserestrictionsgiverisetoavarietyof formsandpeopleoftencompetefortherents.

The 2005 report by the thenBetter Regulation Task

Force in UK articulated the�five principles for better

regulation� as:(i) proportionality;(ii) accountability;(iii) consistency;

(iv) transparency; and(v) necessity


Sometimessuchgovernmentactionsareacceptableorevennecessary,but at other times it takes the form of policy distortions, bribery,corruption,smugglingandblackmarkets.Rentseekinginsuchcasesmay bewasteful of resources, lead to a suboptimal utilisation ofresources, awelfare lossassociatedwithaparticular set of policiesandadivergencebetweenprivateandsocialcostsofcertainactivities.

Supposethegovernmentdecidesonlicenceallocations(sayintelecom,wherethreeoperatorswereallowedpercircle),competitioncanoccurthroughresources to influencing theprobability or expectedsize oflicence allocations (3 instead of 4). Somemeans of influencing theexpectedallocationmaybe in the formof inducements,whichmaynotbeeasilydetectable.

Others, like bribery, hiring relatives of officials or employing theofficialsthemselvesuponretirementarecasesofrentseekingleadingtoa competitiondistortion.Further, in the caseof a restriction likean import licenceor tariffsmayalso leadtocompetitiondistortions.For example the steel industrymay lobby for ban on imports or ahighertariffifimportsareallowed.Antidumpingandsafeguardactionsarealsopotentialweaponsofcompetitiondistortionthoughthesecanbe justifiedonpublicpolicygrounds.

Legislative ReviewTheimportanceofregulatoryimpactanalysishasgrownenormouslyinrecent timesascountrieshaverecognisedthat regulatory failuremayimposehighercoststhanthemarket failuretheregulationsaredesigned to correct. The Planning Commission of India, in itsrecommendationsontheEleventhFiveYearPlan,suggestedareviewofpolicies,statutesandregulationsfromthecompetitionperspective,so that remedial action can be taken to remove orminimise theircompetition restrictive effects. Such a review, the PlanningCommission said, should include regulatory impactanalysis.Thisinvolvescost-benefitanalysisofregulations,withthecosts includingthose of compliance and enforcement of regulations, andwith thebenefitsbeingthewelfaregainsproducedbyregulations.

ACompetitionImpactAssessment(CIA)shouldbeundertakenalso.ThedraftNCPinIndiaalso recommendsCIA.Competition impactassessmentsaredesignedto lookintohowregulations impactonthebehaviour ofmarket participants and to forecast the longer-termbenefits andcosts.Hence, they constitutean indispensable tool fortheassessmentof regulations.Countries including theUK,Korea,AustraliaandSpain26haveconductedcompetitionimpactassessmentsof theirpolicies.

Distortionscausedbygovernmentpoliciesandregulationsareoftenfoundinrelationtotrade,procurement,pricingandsubsidies.Policies

Antidumping andsafeguard actions are also

potential weapons ofcompetition distortion

though these can bejustified on public policy

grounds

Competition impactassessments are designed

to look into howregulations impact on the

behaviour of marketparticipants and to

forecast the longer-termbenefits and costs


sometimes seemto favour public sector players therebydistortingcompetitiveneutrality.(Thereversemayalsobetrueinsomesituations,duetogovernancedeficit).Duetotheiranticompetitiveoutcomes,thereisaneedtoscrutiniseandassesstheirformulationandimplementationon the touchstone of competition. This requires identifying theimpedimentsthepoliciesmightcausetothemarketprocess.

Box 2: Lessons fromAustralia

TheAustralian NCP came upwith the need for a legislative reviewunder Clause 5 of its Competition PrinciplesAgreement wherebytheAustralianGovernment and all state and territory governmentsundertook to identify their existing legislation that restrictedcompetition, and to review, and where appropriate, reform thatlegislation. The guiding review and reform principle [in clause 5(1)]of the Competition Principles Agreement) was that legislationshould not restrict competition unless the benefits of the restrictionto the community as a whole outweighed the costs and theobjectives of the legislation can only be achieved by restrictingcompetition and that a legislation that restricts competition isconsistent with the guiding review and reform principle [clause5(5)].

In 1996 each government developed a review timetable. Thesetimetables identified in total about 1800 pieces of legislation. Theidentified legislation covered awide range of topics. Governmentsalso issued a policy statement that addressed the application ofthis principle to local governments. Governments published annualreports addressing their progress against the legislation reviewand reform commitment, over the period of the NCP. Where areview had a national dimension, the government responsible forthe review could consider whether a national approach wasappropriate. There were several areas where legislation with anational dimension was considered via a national approach.Because the review of such a large number of laws was anextensive task, the National Competition Council agreed that forpurposes of assessing progress with reform implementation, thelegislation should be prioritised on the basis of its likely effectson competition. Priority legislation was to be subjected tocomprehensive review processes and other legislation to desktopassessments. Each of the National Competition Council�sprogress assessments considered legislation review and reformissues. TheNational CompetitionCouncil issued review guidelinesto assist governments and others involved in reviews of legislation.

There was a related commitment under the Agreement toImplement theNCPandRelatedReforms. Thiswas a commitmentby governments to set national standards in accord with thePrinciples and Guidelines for National Standard Setting andRegulatoryAction and advice from the then Office of RegulationReview on compliance with these principles. The Office ofRegulation Review reported annually on compliance.

Source: http://ncp.ncc.gov.au/pages/legislation

Policies sometimes seemto favour public sector

players thereby distortingcompetitive neutrality


Of course, social, environmental, defence or security objectives canoverride economic interests in terms of determining the public ornational interest.Where this is the case, intervention inmarkets toachieve suchobjectives canbeentirely appropriate. It is necessary,however, that such deviations are justified, disseminated and areimplemented in a transparentmanner and that the objectives areclearlyspelt out.

Further, it is very important that there should be a provision forconstantreviewandsunsetclauseforthedeviationsfromtheprinciplesofcompetitionpolicy.Suchprovisionshelpinmonitoringthedeviationsand thus the exemptions can be suitablymodifiedwith change inconditionswhich initially justifiedthedeviations.

Toachieve this, a reviewof governmentpoliciesatboth theCentraland state levels (especially in a country like India, with a federalsystemof government), is essential. The toolkits devised earlier bycountriesandinstitutionsare indeeduseful inthisrespect.WhiletheCompetition Assessment Toolkit devised by Department forInternationalDevelopment(DFID)27 isveryuseful formarketstudies(whichusedCUTSownexperience), theCompetitionAssessmentToolkit of theOECD28 assesses the impactofgovernmentpoliciesoncompetition.

CUTSCompetitionImpactAssessmentToolkitisacomplementtotheexistingtools,asitfocusesmainlyonanalysingcompetitiondistortionscausedbygovernmentpolicies in thedevelopingworld. This toolkituseselementsfromthecompetitionpolicyprinciples.Theseprinciplesof competitionhavebeen identifiedby thePlanningCommissionaswellbytheCommitteeonNCPinIndiaonthebasisof researchdonebyCUTS in India.29

It is important,however, tonote thatacompletecompetition impactassessment ideallyshouldrequire thepreliminaryanalysisof sectorselection,market definition and structure analysis. A process forundertakingapreliminarycompetitionanalysisofmarketsisannexedto thisstudy (AnnexureA).

ThedraftpolicydocumentofCommitteeonNationalCompetitionandAlliedMatters, Ministry of Corporate Affairs,30 in paragraph 8,enunciatesseveralvaluablepolicy initiatives, including:(i) a reviewof existingpolicies, statutesandregulations, andan

impact assessment of those proposed, from a competitionperspective;

(ii) incorporationofprinciplesof competition inall regulations;(iii) settingupanin-housecellwithindepartments/ministrieswith

amandateto:� carry out competition impact assessment of policies andstatutes;and

While the CompetitionAssessment Toolkit devised

by Department forInternational Developmentis very useful for marketstudies, the CompetitionAssessment Toolkit of the

OECD28 assesses the impactof government policies on

competition

CUTS Competition ImpactAssessment Toolkit is a

complement to the existingtools, as it focuses mainlyon analysing competition

distortions caused bygovernment policies in the

developing world


� align public procurement regulations andpracticeswithcompetitionprinciples.

GiventhatthedraftNCPofIndialaysdownprinciplesofcompetition,it is importantthatsuchaframeworkbealignedwiththeseprinciplesaswell.CUTSCompetitionImpactAssessmentToolkit isanattemptin thisdirection.

To serve as an illustrative guide for users, a brief analysis of thepharmaceuticals sector in India along the lines of competitionprinciples isannexedtothisdocument (AnnexureB).

It is an attempt to arrive at an algorithm that draws on previousworkdone inthearea. It ishoweverastep forward inthedirectionofmarryingtheelementspreviouslyetchedoutwiththeprinciplesuponwhichcompetitionpolicyshouldbehinged.Further, it takesaccountofvariouspoliticaleconomychallengesthathaveremainedunaddressedintheframeworksdevelopedthusfarandwhichcontinuetocontributesignificantlytodistortiveoutcomes.

Before listing thequestionsrequiredtobeaskedwhenassessingtheimplicationsforcompetitionofaspecificgovernmentpolicyormeasure,letusbriefly identify theconditionsthatreallydistort competition inthemarket.Thiswillhelpestablisha linkbetweenhowgovernmentinterventions leadtosuchoutcomesbycreatingconditionsconducivetomarket failure.

Competition is distorted in themarketwhen firmspossessmarketpower.Market power canbeunderstoodas theability to profitablyraise and sustainprices above competitive levels or restrict outputbelowcompetitive levels.Whenfirmspossessmarketpower, theyareno longer price takers but are pricemakers andhave the ability tomanipulate prices to gain super-normal profits to thedetriment ofconsumersandtheeconomyasawhole.

Market power depends on several factors ofwhichkey aremarketshares/concentration,barriers toentryandexit,bargainingpowerofbuyers and the degree of product differentiation in the market.Government policies lead to anti-competitive outcomes or distortcompetition in themarketwhen they are directed at (or have theimpactof) enhancingmarketpowerofaselect fewfirms.

Given that the draft NCPof India lays down

principles of competition,it is important that sucha framework be alignedwith these principles aswell. CUTS Competition

Impact AssessmentToolkit is an attempt in

this direction


Chapter 4

The Assessment Framework

Ascertaining distortions induced bygovernment policiesDistorting the level playing fieldbetweencompetitors

� Does thepolicydiscriminate between the state owned enterprisesandtheprivateplayers? Inotherwords,does itdistort competitiveneutrality?AsOECDreporthaspointedout, �whentherearenomechanismsinplace to promote andguarantee competitiveneutrality,mostStateOwnedEnterprisesenjoyunearnedcompetitiveadvantages��It is, however, important not to be confined to distortions thatstrictly fallwithin the ambit of such comprehension. There arecasesofreversecompetitiveneutralitytoo,wheretheprivatesectorhasbeenfavouredagainstthepublicsector,forextraneousreasons.

Box 3: CCI�s Advocacy on Banking Sector

In 2007, the Competition Commission of India (CCI), under itsadvocacy functions, had observed that banking sector would reapthe full benefits of competition only if the Reserve Bank of India(RBI) restricts itself to framing prudential norms for banks andleaves all other issues to market forces. Significantly, the CCIhad suggested that public sector banks should not be given anypreference over private sector ones.

On the other hand, thismove of RBI could be a result of promotingeconomic interest by creating jobs, alleviating sponsored schemesand have good outreach (financial, geographical, etc.).

However, if the claim by private sector banks that they have startedengaging in government-sponsored schemes is correct, thanRBI�sdirection will only stifle competition in the banking sector asreduction in competitionwill not be offset by gains in public welfare.

Box 4: Public Sector Vaccine Units Closed

In January 2008, theMinistry of Health and FamilyWelfare closeddown three public sector vaccinemanufacturing units on groundsof non-compliance with GoodManufacturing Practices. The threeunits were: the 103-year-old Central Research Institute, Kasauli;the 100-year-old Pasteur Institute of India, Coonoor; and the 60-


Creates entrybarriers

� Does the policy limit the entry of foreign players into domesticmarkets?Thisimpedimentisnotreallywithintherealmofcompetitionpolicybecausecountriesdeterminetheirforeigndirectinvestmentpoliciesindependently andonvariousgroundswhere it canbe justified,rightly or wrongly. However, there can be situations where aGovernmentmayadoptapolicywhichlimitsorbarsentryofforeignplayersdueto lobbies inthecountryandthusrestrictcompetitionamongdomesticplayersonly.

It couldalsobeduetoreciprocityconditionswhereacountrydoesnot allow foreignplayers in a sector but is seeking access in thesamesectorinanothercountry.Oritcouldalsobedependentuponthecommitmentsmadebythecountryininternationalagreementssuchas onservices in theWTO.

� Are procedures rule and timebound, transparent, fair andnon-discriminatory?Are the licensing andauthorisation conditionsimposed for starting business too onerous or arbitrary?

year-old BCGVaccine Laboratory, Chennai. The resultant impacton consumers has been catastrophic since these units accountedfor over 70 percent of vaccines needed for the country�s UniversalImmunisation Programme. The number of adverse effects fromimmunisation deaths among children has risen four times sincethe three units closed down � it was reported to be 128 in 2010.

Moreover, following the closure, the vaccines were procured fromthe private sector in addition to those supplied by theWorld HealthOrganisation. In the absence of supply of vaccines from the publicsector, competition in the healthcare sector has been stifled, andthe cost of vaccines in the domestic market has risen by 50 to 70percent in the two years since the closure of the units.

However, the current situation has changed after theParliamentaryStanding Committee on Health and Family Welfare criticised thepractice.

Box 5: Ministries Spar over Entry of Private Players

Private players may lose out on the opportunity to explore coal-bed methane, as two Former key Ministries � Petroleum andNatural Gas, and Coal� hold divergent views on them. FormerOil Minister M. Veerappa Moily proposed that private playersshould be allowed to explore Coal BasedMethane (a form of gasfound in coal beds) along with Coal India in its existing mines.But, Former Coal Minister Sriprakash Jaiswal contested this.

There can be situationswhere a Government may

adopt a policy which limitsor bars entry of foreignplayers due to lobbies in

the country and thusrestrict competition among

domestic players only


� Do the standards set for product quality provide an unfairadvantage to some suppliers over others?

�The proposal to allow private companies to take out CBM in CoalIndia blocks was floated by the Petroleum Ministry twice in thepast one-and-half years. But, the then Coal Ministry objected toit, as it was not comfortable allowing private players to foray intoCoal India�s mines,� a government official informed.

With the third-largest proven coal reserves, and the fourth largestcoal producer in the world, India holds significant prospects forcommercial recovery of CBM. The resource was estimated to bearound 4.6 trillion cubic metres, according to the DirectorateGeneral of Hydrocarbons.

Source: www.thehindubusinessline.com/economy/coalbed-methane-ministries-spar-over-entry-of-private-players/article5383846.ece

Box 6: Unfair Condition Acts as a Barrier

In a tender call for Ayurvedic medicines, the Directorate ofAyurveda inAjmer, Rajasthan, India was seen to bend the rulesgoverning the procurement of medicines by adding a rider thatmanufacturers must have aminimum five-year experience. Thiscondition did not figure in the original call for tenders. Thepurchase committee had decided to invite public sectorundertakings and cooperatives, withGoodManufacturingPractice(GMP) compliance for the purchase bid.

Later, in its advertisement, it inserted a condition requiring thatthemanufacturer must have aminimum five-year experience. Ofthe existing PSUs and co-ops that manufacture Ayurvedicmedicines, only eight had experience of five years and more.Unless a minimum of five-year experience was genuinelynecessary to ensure the level of quality sought, (and the purchasecommittee failed to adequately demonstrate this), such a rideracted as a deterrent for entry.

Also, operations of most of the qualifying companies were beingmanaged by the same set of people which could raise thepossibility of collusive behaviour between the officials and thespecific manufacturers.31

Box 7: NTB to protect domesticfirm from foreign competition

In Zambia, the sugar market is protected from externalcompetition by non-tariff import barriers. The requirement forpotential sugar importers to obtain import permits through abureaucratic and non-transparent process was cited as a barrier.Further, there is a government requirement that all sugar beingsold in Zambiamust be fortified with vitaminA. This is an unusual


� Is there a grandfather clause that treats incumbent firmsdifferently from new ones in a manner that raises costs ofproduction of the newplayers and creates entry barriers?

requirement, which few if any other countries have imposed. Thegovernment argued that a large part of the Zambian populationsuffers from vitamin A deficiency, and since sugar is a staplecommodity, it is a goodmedium through which to provide vitaminA to the people.

However,many stakeholders outside thegovernment and the sugarindustry consider fortification to be a mechanism for protectingthe Zambian sugar market from foreign competition. Theyexpressed the view that there were certain shared interestsbetween Zambian sugar industry players and the Government,favouring continued protection from import competition, andallowing prices and profits to remain high.

Source: www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/6066.pdf

Box 8: The �Grandfather� Rule

The �grandfather� rule followed in India for the purpose of airportslot allocation prefers the allocation of slots to incumbent aircarriers over new air carriers. This creates a barrier to entry fornew carriers and reduces the incentive to compete.32

� Does the policy deny third party access to essential facilities?These are the facilities which cannot be duplicated in aneconomicallyviableway,andwhereaccesstothembyathirdpartyis necessary to ensure effective competition inadownstreamorupstreammarket. Control over essential facilities in networkindustriesbydominant enterprisesundermines competitionbydenyingaccessof inputs indispensable foreffectivecompetitiontonewentrants.Anexample is the celebratedMicrosoft case.TheEuropeanCourtofJustice(ECJ)inits2004rulingagainstMicrosoftheldthatMicrosoft�srefusaltodiscloseinteroperabilityinformationcreated significant barriers tomarket entry, owing to indirectnetworkeffects, and is thusanabusive conduct.

Thisalsoapplies in case of intellectual property if that servesasanessential facility. Standardessential patentsare essential toan industry for setting standards and their access needs to beprovidedonfair,reasonableandnon-discriminatory(FRAND)termssoastoensurecompatibility, interoperabilityandcompetitivenessin that specific industry.

� Does the policy create geographical barriers?

Standard essential patentsare essential to anindustry for setting

standards and their accessneeds to be provided on

fair, reasonable and non-discriminatory (FRAND)

terms so as to ensurecompatibility,

interoperability andcompetitiveness in that

specific industry


Box 9: Entry Barrier for Private Players

TheMinistry of Railways, Government of India, has laid down thatprivate container operators should build their own InlandContainerDepots (ICDs). Stakeholders have expressed concern that thecost of procuring land from the Railways to build ICD has becomea major entry barrier for these private players. At present, if thenew container operators want to use Container Corporation ofIndia Ltd.�s (CONCOR), the incumbent monopolist�s, ICDs (anessential facility) they have to pay access charges. The accesscharges fixed by CONCOR are extremely high and are almost�prohibitive.�33

Box 10: Parallel Imports

An example can be found in the area of Intellectual Property Right(IPR)-protected goods, and pertains to parallel importation. Parallelimports means that a trader can import IPR-protected goods fromanother country, if the same are available at a cheaper price thanin his/her country where the good enjoys protection.

Under theWorld TradeOrganisation (WTO)Agreement onTrade-RelatedAspects of Intellectual Property Rights (TRIPs), a countrycan allow import of IPR-protected goods from outside withoutviolating the IPR laws. The counter argument is that once thegoods are sold in the market, the principle of exhaustion of rightsapplies. Countries operating under an international exhaustiondoctrine such as India may well be able to overcome thegeographical barriers and trade in goods.

A common argument against allowing parallel importation is ofcounterfeit goods. However, this is a piracy issue, not to beconfused with parallel imports. Parallel imports are allowed inIndia and a policy circular was passed by theMinistry of Finance�sCentral Board of Excise & Customs on this, and was issued onMay 08, 2012.34

Alas, while the issue of parallel imports has been clarified by thegovernment in the case of patented and trademarked goods, thishas not occurred so far in the case of copyrighted goods.

Box 11: Government Direct PSU Banks toOpen more Branches in NE States

The government�s step (October 2011) to direct PSU banks toopen more branches in the seven states located in the North-Eastern part of India, is a welcomemove. The seven sister statesin the region: Arunachal Pradesh, Assam, Meghalaya, Manipur,Mizoram, Nagaland and Tripura � are home to 70 unbankedblocks and 55 under-banked districts as banks have generallyshied away from this economically backward terrain mired byinsurgency. However, the move to direct public sector banks onlyto serve this region (by providing a �first mover�s advantage�) isbeing questioned by some experts This move will also add to thecosts of PSU banks.


Limits free and fairmarket process

� Does it limit free flow of goods and services?Article301oftheConstitutionofIndiaprovidesforfreedomoftradeandprofessioninIndia,whichisalsoguaranteedasaFundamentalRight.Article 304 (a) allows the state legislatures to imposeanytax to which similar goodsmanufactured in its own state aresubjected soasnot to discriminatebetween importedgoodsandthosemanufactured in its state; andArticle 304 (b) allows thestatelegislaturestoimposereasonablerestrictionsonthefreedomof trade, commerceor intercourse.

Inpractice,however, thereasonablerestrictionsonthefreedomoftradeandprofessionhavenegatedtheverypurposeof theArticle301.Further,Article246of theConstitutionof Indiaprovides fordivisionofpoweramongCentreandstateswithrespecttotaxes.Itallows taxationby theCentral governmentuptomanufacturingstageandonsale/distributionofgoodsbystategovernments.Thisdivision leads tomultiplicityof taxesandcascadingof such taxesoncostofproductionandservices.

Variance in the taxratesacross states leads todistortionof tradeandcommerceflows.

Similarly,theEleventhPlanaswellastheTwelfthPlandocument35observed that regulations, such asEssentialCommoditiesAct,AgriculturalProduceMarketingCommittee (APMC)Actandthecontrolorders issuedundertheseactshavecreatedrestrictiveandmonopolisticmarketingstructures.Thedocument furtheraddedthat these restrictions have an adverse impact on agriculturalproductionandsystem,efficient flowofcommoditiesandfosteringcompetition.Suchregional tradebarriersmayaffect thenationalinterestandwill bedisadvantageous tostates in the longrun.

This kind of treatment, competition scholars feel is a violation ofthe principle of competitive neutrality. Lessons may be drawnfrom the telecommunications sector in this instance where it hasbeen recommended to utilise the Universal Service Obligation(USO) Fund to provide subsidy to those that provide telecom andIT services via satellite in rural and hilly areas.

Universal service is an economic, legal and business term usedmostly in regulated industries, referring to the practice of providinga baseline level of services to every resident of a country. To fundthe telecom USO, India has set up a fund which can be used toprovide assistance to the service suppliers.

The Eleventh Plan as wellas the Twelfth Plan

document observed thatregulations, such as

Essential Commodities Act,Agricultural ProduceMarketing Committee

(APMC) Act and the controlorders issued under these

acts have createdrestrictive and

monopolistic marketingstructures


Box 12: Entry Tax Act Sparks Legal Battle

Part XIII of the Constitution deals with Trade, Commerce andIntercourse within the territory of India. The Supreme Court ofIndia in case ofAtiabari Tea Company Limited vs. State of Assam& others [1961 AIR SC 232], has held that power to tax vested bythe legislative list in the Parliament or State legislatures, iscircumscribed by Part XIII of the Constitution and if the exerciseof that power does not conform to the requirements of Part XIII, itwill be regarded as invalid.

In the case of Automobile Transport (Rajasthan) Ltd. vs. State ofRajasthan [AIR1962SC1406], the challengewas to theRajasthanMotor Vehicles Taxation Act, 1951 before the Indian SupremeCourt. The challenge to Article 301 was rejected by holding that�the taxes are compensatory taxes which instead of hinderingtrade, commerce and intercourse facilitate them by providing andmaintaining the roads� There have been various cases decidedon these matters. Supreme Court in a five member bench in thecase of Jindal Stainless Ltd. and another vs. State of Haryanaand others [2006�145�STC-0544�SC] observed, compensatorytax is a compulsory contribution levied broadly in proportion tothe special benefits derived to defray the cost of regulation or tomeet the outlay incurred for some special advantage to trade,commerce and intercourse. It needs to be shown that the paymentof compensatory tax is a recompense for the measurable benefitprovided to its payers.

Further, it said that if enactment invades freedom of trade, it isnecessary to enquire whether the State has proved that therestrictions imposed by it by way of taxation are reasonable andare in public interest and satisfy the conditions laid down inArticle304(b) of Constitution of India. Hence, these judgments emphasisethat the imposition of taxmust be with definite purpose of meetingthe expenses on account of providing or adding to the tradingfacilities and should not hinder trade and commerce. Based onprinciples enunciated by the Supreme Court, various appellateauthorities and High Courts have held respective State�s EntryTax Act�s as unconstitutional.

Promotesmonopolies and their abuse

� Does it encourage the exchangebetweensuppliers, orpublication,of information on prices, costs, sales or outputs?

Box 13: Growth of Public Sector in India

In May 2012, the Indian Finance Ministry passed an order askingfour dominant Public Sector Undertaking (PSU) insurancecompanies to share all the information they held regardingpremiums, claims etc., so as to avoid any competition betweenthem, thus creating a cartel within the industry. The order alsoincludes a clause of not quoting lower prices at the time of renewalby any company to attract a client of another company. Thecompanies happen to own over 56 percent of the total marketshare collectively. Policies like these are nothing but sanctioningcartelisation in the industry.


� Does it allow for firms to use incumbency advantages to createstrategic entry barriers for newplayers?

Box 14: Exclusive Rights to Public Sector Companies

There are several instances to show how exclusive rights aregranted or preference given to public sector companies to provideservices in various sectors. Three such examples are providedbelow, drawn from three key sectors of the economy:

(i) Civil Aviation: Government officials and others ongovernment business are only supposed to travel by thenational carrier in India (Air India);

(ii) Postal Services: Filled-up income tax return forms fortaxpayers using the electronic payment system are to besent only using the government postal services;

(iii) Bus Transport: According to the Motor Vehicles Act, 1988of India, preferences are given to state transport corporationsto ply buses in new routes that are opened up.

Box 15: CONCORAbusing Dominant Position

CONCOR, an incumbent and a company owned by the Ministryof Railways in India, has an enormous infrastructure base,whereas the private players, allowed to operate in the space ofcontainer transport recently, find that building infrastructurerequires a large capital outlay. CONCOR, with a market share of95 percent, tends to misuse its dominant position against thenew entrants. Therefore, evenwhere private operators are able towin traffic, CONCOR is in a position to undercut prices, which ithas been alleged to do, due to its wider scale of operation andpreferential treatment. This deters competition and has anexclusionary effect. Besides this as Railways are the owners ofCONCOR theyprovide stepmotherly treatment to private containeroperators in various ways, such as allocation of rakes or landunder Railways to set up depots etc.36

� Does it grant exclusive rights for a supplier to provide goods orservices?

Limits the scope to introduce new products or supplyexistingproducts innewways

� Is there a restriction on the products that can be supplied?

Box 16: Supply Licence

The illustrationabove,whereby theGovernment of Zambia imposeda condition for potential sugar importers to get a license to supply,if and only if, they were able to supply sugar that fortified withVitamin A.


Limits institutional independenceIt is an important principle of governance that there should beinstitutional independence in the structure. It is important thatauthoritieslookingintodifferentaspectspertainingtothefunctioningof thesectorbeallowedtodoso.Forexample, intheelectricitysector,aneedhasbeen felt since 2009 to separate theworking of theLoadDespatchCentres,TransmissionandDistribution.

However, little has been done in this regard despite the strongrecommendationsof theCentralAdvisoryCommitteeof theCentralElectricityRegulatoryCommission(CERC)since2009.TheCERCsaidthat it is not only important to grant independent status to theseauthoritiesbutalsotoinsulatetheloaddespatchcentresfrompoliticalpressure.

However, thefactthatthisrecommendationwasnotheededtocanbeexplainedbyreviewingthereasonbehindthemassive,unprecedented�grid-failure� that happened in July 2012 in India.One of themainreasonsof this incidentwas that the �northerngrid� overdrewpowertosatiatethedemandofthepowerful farmingcommunityofnorthernIndia, which had experienced a badmonsoon. The regional loaddespatch centres were unable to intervene due to the politicalundercurrents inthematter.

� Is there a restriction on the production process used ormeansof supply?

Box 17: Compulsory Licensing

Intellectual property confers a legal monopoly while competitionis concerned with economic monopoly or market power of firms.Intellectual property, therefore, is not in conflict with competitionpolicy and law in this manner. However, a problem may occur ifsuch power is abused. Policy towards intellectual propertyprotection can also have an adverse impact on competition attimes. The length and breadth of a patent is crucial here. Theproblem of ever-greening of patents can limit generic competitionto a large extent.

In an Indian cases where a cancer drug Glivec was denied patenton the ground of preventing ever-greening serves a good example.This action is in compliance with TRIPs and aims at ensuring thatweak patents are not grantedwhich have anticompetitive potentialand can be abused later on.

Further, the need is to balance the exclusive rights provided underthe intellectual property laws and themajor innovation enhancinggoal of IP laws. This balance can be achieved by using tools likecompulsory licensing coupledwith reasonable royalty in rare caseswhere the exclusive rights provided are not beingworked properly.Thus, compulsory licensing coupled with reasonable royaltyensures that the innovation is used effectively for welfare.37

It is an important principleof governance that thereshould be institutional

independence in thestructure


Is a subsidy or state aiddistortionary?� Is themeasure proportionate to what is required to achieve theintendedobjective?

� Does it offer an unfair advantage to the beneficiary vis-à-vis itsrivals?

� Does it promote soft budget constraints and operationalinefficiencies?

Box 18: Failure of Regulatory Environment in theAbsence of a Legal Framework

The lack of factual separation between policymaking (Departmentof Telecommunications), regulation (TelecomRegulatoryAuthorityof India) and the incumbent operator [Bharat Sanchar Nigam Ltd(BSNL) andMahanagar TelephoneNigamLtd. (MTNL)] has partlycontributed to potentially distortionary interventions or regulatorypractices. In the absence of a legal framework demanding thesame, the regulatory environment failed to impose competitionfriendly measures such as unbundling of the local loop, sharing ofoptic fibre cable and other critical infrastructure and sufficientregulatory oversight to ensure that points of interconnect(bottleneck infrastructure) are provided fairly and expeditiously byBSNL to its competitors.

The competition distorting impact of this regulatory deficit hasbeen borne primarily by the customer as exemplified by India�slow landline penetration rate (2.59 percent as on June 30, 2012)and abysmal broadband penetration rates. Likewise, ex anteregulation is also needed to ensure competition in marketsegments where private sector dominates such as access tointercontinental undersea cables through landing stations.

Source: The Economic Times, August 22, 2012

Box 19: Violation of Principles of �Competitive Neutrality�

Losses in the Indian domestic aviation industry are ubiquitous.Most of the running domestic airlines have been operating underhuge losses. This led to the shutdown of Kingfisher Airlines.However, the government continued to helpAir India, the incumbentgovernment carrier, with regular bail-out doses. This is againstthe principle of fair competition in the market (domestic aviation),as has not only been felt by experts,38 but also by the CCI.39

However, the CCI can only make suggestions to the Governmentof India, as it has done in this case which seem to violate theprinciple of �competitive neutrality�. In spite of trying to infuseefficiency in its operations, Air India can continue to operate inthe manner it has operated given the assurance that theGovernment would be there to bail it out, every time its financialposition touches the bottom.

Recently, two PSU telephone companies. BSNL and MTNL inIndia have sought a bailout package to fund their one time spectrumfee burden. All the private competitors have rightly opposed thismove.


In theEuropeanUnion, thereare regulations to checkstateaidsbyconductingacostbenefitanalysisbetweenthedistortionscausedbystateaidsandthebenefitsofcorrectingmarketfailurestowhichstateaidisdirectedat.Article107oftheTreatyonFunctioningofEuropeanUnion addresses this issue and recommends adopting a refinedeconomicapproachandconductingabalancingtestwhendealingwithapprovalofstateaids.

There is ample evidence to show that state aids end up distortingmarketcompetition.Theyalsopromoteoperational inefficienciesthatresemblethoseassociatedwithmonopoliesastheincentivetoperformisdampened.

Is themeasuredrivenbyvested interests promotedby thegovernment?� Is the government enjoying benefits fromopposing reforms?� Is the government sharing the high profits through taxes etc.that dominant playersmay be able tomake if they are allowedtomaintain such position in the absence of competition in themarket?

Vested InterestsBusinessandtheirassociationsgenerallyopposecompetitionregimesastheyfeelthatitwouldreducetheirmarketshareandhencebusinessprofits. Inmostdevelopingcountries,economicpowerisconcentratedandsuchbusinessesusually fundpolitical activitiesandhavegreatinfluenceovereconomicdecisionsthatpoliticiansmake.

Forexample, inThailand, thoughthegovernmentenacted itssecondcompetition lawin1999, todate ithashadvery limited impactduetothenexusbetweenpoliticiansandbusinessmen,andcronyism.TheCompetition Board is headed by the Minister and comprisesbusinessmen toowho are loath to implement the law in spirit andletter.

Countlessotherexamplesexistfromotherdevelopingcountrieswherebusinesslobbiesopposedtheadoptionofacompetitionlaw.Whereverthe implementation took place, business lobbies with support ofpoliticianscreatedobstacles forproperimplementation.

Wheneconomicvested interestsdominatepolitical power theyalsolimitgrowthdynamicsandcurtaileconomicopportunities forpovertyreduction indeveloping countries. Furthermore, the situationalsocreatesentrybarriersfornewentrants.However,thevestedinterestsamongentrenchedproducergroupsarealsonothomogeneous.Thenexusbetweenbusinessandgovernmentmaybedifficult tobreak.

When economic vestedinterests dominate

political power they alsolimit growth dynamics and

curtail economicopportunities for povertyreduction in developing

countries


Box 20: New Excise Policy Evokes Good Response

The government backed monopoly in the case of liquor in theIndian state of Uttar Pradesh (a large statewith 200mnpopulation,which is perhaps bigger than most countries in the world) after itdecided to abolish the system of multiple wholesale dealers ongrounds of controlling the trafficking of spurious alcohol fromneighbouring states and giving it all to just one seller of alcoholpopularly known as Ponty Chadha presents a good example.This did not necessarily result in higher revenues, but certainlyhigher �revenues� for politicians in the shape of rents.

It had first happened under the BSP government in UP in 2007-12 and has been reinstated by the Samajwadi Party after it cameto power in 2012. Meanwhile Ponty Chadha was killed, but hisbusiness was inherited by his son.

A contrarian example comes from Rajasthan, another state inIndia, where the excise policy governing the distribution of liquorwas changed and the government revenues shot up every year.ACUTS report, �Towards a Functional Competition Regime in India�(2005) highlighted how anticompetitive outcomes in the marketoften resulted from state government policies. The report waspresented to the then Chief Minister of Rajasthan in a pre-budgetconsultation meeting in 2005. The state government waspersuaded by the report�s recommendations andmade changesin the State Excise Policy with a view to break the liquor cartelsprevalent in the state. The government also established theRajasthan State Beverages Corporation Ltd. (RSBCL) to takeover the role of purchaser and supplier of liquor, dispensing withexploitative middle men.

Furthermore, in a significant departure from its earlier policy ofexclusive privilege system, the government introduced a two-tiersystem of licensing � licenses for wholesaler as well as retailer �on the basis of a fixed license fee. The process of allotment wasbased on a lottery system. The new system provides liquor sellingrights to a large number of vendors. The lottery system meantthat the selected vendors were not necessarily known to eachother. The large numbers selected meant that cartel formationand implementation had been rendered impracticable.

Source: www.cuts-ccier.org/pdf/FairCompetitionLeadstoRiseinStateRevenue.pdf

Box 21: Governments Sometimes Benefit fromUncompetitive Situations

Papua New Guinea, for instance, had earlier prevented newentrants in themobile phonemarket to protect the statemonopolyin this sector, as the SoE would have been unable to competeeffectively and because the government saw the public enterpriseas a source of revenues. Asimilar case was unearthed by CUTSduring its competition research and advocacy activities in Togo(7Up4 project). In Togo, the government, for a long time did not


DoesnoteffectivelypreventanticompetitiveconductDeveloping country competition agency � going is toughToeffectivelypreventanticompetitive conduct, a countryneedsaneffective competition law. If one looksat thesituation indevelopingcountriesthereisaspurtofdesigningandadoptingcompetitionlaws,whichmeanstheglass ishalf full.However, theirperformancevariesandismuchdependentuponthepeoplewhorunit.

Zambia is a good case in point. The litmus test for this question istherefore thedesignof the lawandthe institutionswhichrunthem.Peru isagoodexample.Bangladesh isnot sogoodexample that thelawhasbeenpassedbut implementation is lacking.Moreover, thelawisbadbecauseappealsagainst theCommission�sorders liewiththeMinister.

In the samevein, theKenyan competition regimewas similar andnowthe latest lawhascreatedanindependentbody.

Long gestation period is commonIfcompetitionpolicyandlawistoyieldtheenvisagedbenefits,politicalwillandconsensusforreformisnecessary.Adoptingorstrengtheninganexisting lawby itselfwillnothelp, there isneedtocreateastronginstitutionalmechanism to enforce it forwhich the politicalwill isvery crucial.

InMalawi,althoughthegovernmentclaimedtosupportcompetition,therewas a long gap between the enactment of relevant laws, theestablishmentofthecompetitionauthorityanditsfunctionalinitiation.

renew the license of a secondmobile operator (Moov), which hadbeen gaining market space causing discomfort to the erstwhilestate monopoly, Togocell. However, due to escalating public andmedia pressure, the government finally agreed to renewMoov�slicense to the relief of the Togolese consumers.

According to the Law on Mineral Resources of Vietnam, onlySoEs are permitted institutional access to the national mines.Enterprises from the non-state can only gain access to thesemines through contracts with SoEs, which is totally in contradictionwith the principle of non-discrimination/fair treatment. Privatecement producers in Vietnam have to get the approval of theGeneral Cement Corporation (their very own competitors) on theirallocated quota to import clinker for producing their own finishedproducts � an authority which has been bestowed by the Ministryof Industry.

One can find example of CG Iron sheet sector in Bangladeshwhere the government decided arbitrarily that there is enoughcapacity in the country and did not allow new entrants, withoutappreciating the fact the new entrants may be able to producebetter quality at a lower price.

To effectively preventanticompetitive conduct, acountry needs an effective

competition law

Adopting or strengtheningan existing law by itself

will not help, there is needto create a strong

institutional mechanism toenforce it for which the

political will is very crucial


In Bangladesh, theMonopolies andRestrictive Trade PracticesOrdinanceremainedonthestatutebooks,whichwereinheritedfromPakistan, afterBangladesh split from it.But thegovernment onlyattempted toadoptacompetition lawuntil recently. In2013,anewcompetition lawwasadoptedbyBangladeshmainlybecauseof theintervention of bilateral donors, such asEUandDFIDas part oftheir support for improving thebusiness climate, andaidedbycivilsociety organisations such as CUTS and international bodies.However, itsactual implementationstill remainsaquestionmark.EvenincaseofIndia, theperiodbetweentheadoptionof the lawanditsactual implementationtookalmost fiveyears.

If the answer to any of the nine questions (A to I) above is in theaffirmative, thepolicyshouldrequire furtheranalysis.

The lastquestion tobeposedbefore concludinganalysiswithin theprescribedframeworkisshownbelow:

Box22:Australia�sCompetitionPrinciplesAgreement

LegislativeReview:Theguidingprincipleisthatlegislationshouldnotrestrict competitionunless it canbedemonstratedthat:1. Thebenefitsoftherestrictiontocommunityasawholeoutweighthecosts, and

2. The objectives of the legislation can only be achieved byrestrictingcompetition.

Balancing Interests: PublicNotificationandJustificationofDeviations fromCompetitionPrinciplesIndiaandotherdevelopingcountriesarefollowingthepathofinclusivegrowth.Thereareseveralsocio-economicandenvironmental factorsthataregivenprominenceinsuchaneconomyandpolicieshavetobealignedtobe inconformitywiththem.

Anexample isprice control inpublic interest in thepharmaceuticalsector to ensureaffordability.Competitionpolicy or in this caseanypolicymust be tailoredaccording to the specific needs of a country.Thus, there canbe justifiable cases of deviations fromcompetitionkeeping inviewspecific context.

Apolicy deviating fromcompetition shouldadhere to the followingrules:� Thestatedobjectiveshouldbewelldefined� Thepolicyshouldbenecessarytoachieve thestatedobjective� Thenatureof restrictiononcompetitionshouldbe identified� The likely effect of restriction on competition and the economyshouldbeanalysed


� The policy should be decided in a transparent and non-discriminatorymanner

� Thecostsandbenefitsof restrictionshouldbeweighed� Alternative means to achieve the policy objective should beconsidered

If there isanotherpolicyalternative thatmaybeable toachieve thesameobjectivewitha lesserextentofdistortiontocompetition, thenthatshouldbeemployed� Inclusionofa �sunset clause� for thepolicymaybedesirable� Implementationofthepolicyshouldbemonitoredandreviewed


Annexure A

Competition Analysis of Markets

Preliminary Steps of Competition AnalysisI. SectorSelection �RationaleInordertostartwiththeexercise,oneneedstoselect thesectors thatshouldbesubjectedtoarigorousassessment.Somesectorsmayhavemoreimportancethanothers,becauseoftheircontributiontonationalgrowthandtheirimpactonthequalityoflifeofconsumers.Distortionsto competitioncanhavesevereadverse impactsontheeconomyandontheaverageconsumer.One important criterioncouldbesector(s)whichcausehighpublicpain,andif suchsector(s) canbetamedthenpublicbuy inof the competition lawcanbehigh.

Step 1:What are the commonly usedmethods to identifythe sectors to be studied?Thesectorselectionshouldbebasedonthe following factors:� ImportancetotheeconomyIs the sector important to the economy, because:� itmakesasignificant contribution tonational incomeor� it has linkageswith other sectors/industries as a provider ofinputsandservicesor

� itprovidesscopeforwidergainsthroughinnovation, improveddistributionandbusinessprocessesor

� it is significant for investmentandproductivity levels?

� ImportanceintermsofconsumersIs the sector important to consumers, because:� it suppliesgoodsorservices thatareessential, or thataccountforasignificantpartof consumerspendingor

� itdirectlyor indirectlyaffects thequalityof lifeof thepeopleor� it contributes to thealleviationofpoverty

� Historyofallegedanticompetitiveconduct� Vestedinterestsopposedtoreforms� Patternofhighmarketconcentration

II.Determining the relevantmarket andcompetitorsThenext step in any competition analysis is defining the relevantproductaswell asgeographicmarket.Marketdefinition is themostcrucial step in any competition analysis. If markets are defined


incorrectly,itaffectsfurtheranalysissuchasmarketsharecalculation,assessmentofbarrierstoentry,etc.Forexample,ifmarketsaredefinedtoonarrowly,afirmmayappeartobedominantwhenitmaynotbesoand if theyaredefined toobroadly, theopposite is true.

Forexample,Section19(6)and19(7) of the IndianCompetitionAct,2002,laysdowncertainconditionstobeconsideredwhilemakingsuchdetermination.

Section19(6) The Commission shall, while determining the �relevant

geographic market�, have due regard to all or any of thefollowingfactors,namely:�(a) regulatorytradebarriers;(b) localspecificationrequirements;(c) nationalprocurementpolicies;(d) adequatedistributionfacilities;(e) transportcosts;(f) language;(g) consumerpreferences;(h) need for secure or regular supplies or rapid after-salesservices.

(7) TheCommissionshall,whiledeterminingthe�relevantproductmarket�,havedueregardtoall oranyof the following factors,namely:�(a) physical characteristicsorend-useofgoods;(b) priceofgoodsorservice;(c) consumerpreferences;(d) exclusionof in-houseproduction;(e) existenceofspecialisedproducers;(f) classificationof industrialproducts.

Step II: How to determine the relevant market for thepurpose of the study?Several jurisdictions followaSmall butSignificantNonTransitoryIncreaseinPrice(SSNIP)testwhichisalsoknownasthehypotheticalmonopolistictest.Thiscanbesimplyexplainedasthesmallestmarketthatamonopolistcanmanipulate.Thehypotheticalmonopoliststartswithaproductunderinvestigationandthenseeswhethera5-10percentincreaseinitspriceisprofitable.Ifitisnot,thenthatmeanssubstitutesare available that render such price increase unprofitable. Themonopolist thenaddsthesubstitute to the listandrepeats thetest toseewhether theprice increase isprofitable then.This isan iterativeprocessandendsoncethehypotheticalmonopolisthas foundagroupof all the substitutes such that an increase inprice by 5-10percent


wouldbeprofitable forhim.Thetestprimarilyreliesondemandsidesubstitutability and while EU additionally looks at supply sidesubstitutability, theUSdoesnotas thesamecanbeaddressedwhenassessingbarriers toentryandexpansion.

Thisstepshould involveananalysisabout the following:Demand-sidesubstitutabilityanalysis� Who are the existing suppliers in themarket for a particularproduct?

� Whoarethemainbuyers fromthesesuppliers?Theirpurchasinghistory can throwsome light on the substitutability of a certainproduct. If buyersmove their purchases between suppliers asopposedtobeingfixedtotheselect few,substitutes fortheproductexist in themarket.

Supply-sidesubstitutabilityanalysis:� Are thereother suppliers that canenter themarketbyadjustingtheirproduction linetooffer thesameproduct?

� Are importsarealisticalternative forbuyers?

Ifanyoftheaboveispossiblethenmoresubstitutesexist.Thesecouldimposeacompetitiverestraintontheproduct inquestion,making itdifficult foraproducer to sustainaprice rise.

III.MarketStructureAnalysisThestructureofamarketrefers to thenumberandcharacteristicsofthe firms in it.Many industries ormarkets aredominatedbya fewfirms.Otherscontainmanysellers.

Insomemarkets,productsarehomogeneouswhile inotherstheyareheterogeneous(includebrandedproducts).Dependingonthenumberof players, barriers to entry, nature of products, marketsmay becharacterised as perfect competition, monopoly, monopolisticcompetitionandoligopoly.

Step III: Ascertaining the following: (i)What is the level ofconcentration intherelevantmarket? (ii)Doentrybarriersexist? (iii) Is there significant countervailing power bybuyer? In otherwords, this stephelps inunderstanding ifthemarket structure competitive?Indeterminingtheabove, the followingneedstobe lookedat:� Market concentrationThenumberofmarketplayersmayhelpindicatehowconcentratedthemarketis.TheHerfindahlHirschmanIndex(HHI)ispopularlyused to calculate concentrationbasedonmarket sharesof firms.Theindexnumber isequivalenttothesumofthesquaredmarketsharesofall firmsinthemarket.Ifmarketshareshavebeenstableoveraperiod then it ispossible that themarket is concentrated.


� Entry barrier analysisThere has been considerable debate on the definition of entrybarriers for a longperiod.Howeverat this point itmaynot be soimportanttoget intothat intheabsenceofaclear favouriteone. Itis,however,importanttounderstandthatentrybarrierscanretard,diminish, or entirely prevent themarketsusualmechanism forchecking market power: the attraction and arrival of newcompetitors. Inorder tobeable toposea threat to the incumbentfirms, entry should be likely, that is, commercially feasible,sufficient in termsof scale of operationand timely, (saywithinaperiod of 2 years). It may be useful to see if there has been aninstance of entry of new firms into the relevantmarket in therecentpastandhowsuccessful ithasbeen.

Entrybarriersmaybecharacterisedasnatural (accesstoessentialinput, natural resources, intellectual property etc.), strategic(behaviourof incumbent firms that raise the rival�s costs suchasexclusive supplyanddistributionagreements, predatorypricingetc.)andregulatory(licensingconditions,discriminatorylawsetc.)

� BuyerpowerIfasinglebuyerorasmallgroupofbuyersaccountforasubstantialpart of themarket then they canexert a countervailingpower ifthesellerstrytoabusemarketpower,solongastheyhaveanotheralternativesourceofsupply includingself-supply.


Annexure B

Application of CompetitionPrinciples vis-à-vis

the Pharmaceutical Sector in India

1. Principle: Fostering Competitive NeutralityApplication:Competitiveneutralitynotonlymeansthatpublicsectorshould not be unduly favoured but also that it should not bediscriminatedagainst.Thereareglaring instancesofdistortionofalevel playing field in favour of private sector (reverse competitiveneutrality) in thepharmaceutical sector.

For example, three large vaccine manufacturing Public SectorUndertakings (PSUs) (CentralResearch Institute atKasauli, thePasteurInstituteofIndiaatCoonoorandtheBCGVaccineLaboratoryatChennai)were closed down in January 2008 on grounds of non-compliancewithGoodManufacturing Practices even though thevaccinesproduceddidcomplywithstandardsofsafety.

The government has, since the closure, been procuring vaccinesrequired for the country�snational immunisationprogramme fromthe private vaccine companies at high prices, thereby leading to asubstantialincreaseintheexpenditureontheuniversalimmunisationprogramme.

Evidencehasshownthatprivateplayersofferedvaccinesatcompetitiveprices prior to closing down of the three PSUs after which thegovernmenthasbeenseentosteadilypayhigherprices forprocuringvaccines fromthemtothisday.This isbecausetheclosurehasstifledcompetition in thepharmaceutical sectorwith onlyprivate vaccinemanufacturersoperatinginthemarket,andthishasseenaresultingincrease in theprice of vaccinesbyup to75percent.

2. Principle: Procedures to be Rule Bound,Transparent, Fair and Non-discriminatoryApplication:UndertheDrugandCosmeticsAct,1940theregulationofmanufacture,saleanddistributionofdrugsisprimarilytheconcernof theStateauthoritieswhiletheCentralAuthoritiesareresponsibleforapproval ofnewdrugs, clinical trials in the country, layingdownthequality standards fordrugs, control over thequalityof imported


drugs, coordination of the activities of State Drug ControlOrganisations andproviding expert advicewithaviewof bringingaboutuniformity intheenforcementof theDrugsandCosmeticsAct.

It is essential that theDrugsControllerGeneral, the StateDrugsControllersandthevariousdrugs inspectorsandotherofficerscarryout these tasksasper the laws, rulesandregulations laiddown inatransparentandnon-discriminatorymanner.

Quiteoftenithasbeenseenthatrulesarenotappliedinatransparentor a fairmanner. Authorities also use circulars etc. to define theirowninterpretationofthelawsandpolicieswithoutproperconsultationwiththeaffectedparties.

InSagarMedicalHall vs.State ofBiharapetitionwas filedagainstthe order of StateGovernment restraining the regional licensingauthorities from issuing or renewing licence for thewholesale andretail sale of drugs. Rule 64 of Drugs and Cosmetics Rules, 1945provides for conditions subject towhicha licence shall begrantedorrenewed.TheStateGovernment�s justification for itspolicydecisionwasthatthebanontheissuanceofwholesaleandretaildruglicenceswasatemporarymeasure toprevent thespurtof spuriousdrugs.

TheStateGovernmentsaid that therewereadequatedrugstores tomeetpublicneed.TheHighCourtheldthat thegrantandrenewalofdruglicenceisgovernedbystatutoryrulesandnowheredosuchrulesprovide that the license can be declined or renewal refused on thegroundthattheStateGovernmentreckonsthatthenumberofshopsaresufficient tomeetdemandofpublic.

Thus, executivedecisionsof theState cannot override thestatutoryprovisions.Thiscaseshowshowsometimesrulesaremisinterpretedbytheauthoritiesinamannerthatcanbedetrimentaltocompetition.

InBharat Biotech International Ltd. vs. A.P.Health andMedicalHousing and InfrastructureDevelopmentCorporation, eligibilitycriterionforthetenderforsupplyofHepatitis-BdrugsrequiredWHOpre-qualification.Thiswaschallengedasarbitraryandwiththeintenttoexcludecompetitioninfavourofonemanufacturer.TheHighCourtevaluated the provisions of Drugs and Cosmetics Act. The courtconcluded that the State had failed to establish thatWHOadoptsstandardsthatarehigherthanthestandardsadoptedundertheIndianlaw for assessing the quality of theproduct. It held that the Indianlawswere stringent in ensuring ahigh standard of drugs but thatthese lawshavebeen futile because of laxity onpart of theState inenforcingthelaw.InsteadofrectifyingtheimplementationoftheAct,theState cannot seekshelter in suchamanner.Accordingly, suchaprequalificationwassetaside.


3. Principle: Third party access to essentialfacilities on reasonable fair terms will ensureeffective competition and therefore, should beprovided in lawApplication: It is correct to assert that all forms of IPRshave thepotential to stifle competition since theyprovide exclusive rights tothepersonwhohasclaimedthesameforaninventionetc.asthecasemaybe.With regard to thepharmaceuticalmarket, patents confermonopolystatustopharmaceuticalcompaniesaspatent-holderwhoisgrantedexclusiverights tomake,useorsell aproduct foraspecifiedperiod.Access toaffordablemedicines canseriouslybe impacted incaseswherepatenteddrugsarepriced to extractmonopolyprofits.This ismoreofaconcernnowinIndiawiththeproductpatentregimeinplace from2005tocomplywithIndia�sobligationsundertheWTOTRIPsAgreement.

Theabuseofmonopolypowerbestowedonthepatenteebythepatentsystemcouldberemediedthrough licenses.Thismethodofallowingflexibilitywas introducedby theTRIPs to safeguardpublic health.Indiahas incorporated liberalprovisionsof �compulsory licensing� inthePatentAct (Sections 84, 92, 92A, 100).Unfortunately little hasbeen done to date, with the exception of one case of compulsorylicensing.Compulsory licensing canallowmanufacture of genericversions of patented drugs before the expiry of themonopoly rightconferredon thepatentee, subject to certaingrounds laid out in therelevantprovision.

Furthermore, recognising thepotential ofmonopolistic practices tothwart competition through the patent regime, the Parliamentintroduced a significant and important provision to prevent �ever-greening�andthegrantof frivolouspatents.

Thisissection3(d)ofthePatentAct.TheHighLevelMairaCommitteeonAffordable,AccessibleandAcceptableMedicines forall reiteratedthat there is evidence that the international norms for IPRs in thepharmaceutical industrymaybegoingtoo fartowardsprotectingthemonopoliesof the inventorsandhurtingthe interestsof consumers.

Therefore, Indiamust not go any further thanwhat it is alreadycommitted to underWTOandTRIPs. Itmust not succumb to thepressurebeingbrought on it tomodifySection3(d).While this sub-section is one of themost pro-competitive provisions in the IndianPatentAct, itssuccesshasbeenlimitedduetothemanner inwhichithasbeeninterpretedandimplementedbythePatentOffice.


4. Principle: Ensure Free and Fair MarketProcessApplication:Manyprocurementpoliciesofthegovernmentareseento introduce entrybarriers in themanner tenders/bids aredrafted.Forexample, inatendercall forAyurvedicmedicines, theDirectorateofAyurvedainGovernmentofRajasthan,Ajmerwasseentobendtherulesgoverning theprocurementofmedicinesbyaddingconditionsthatmanufacturersmusthaveminimumfiveyearsof experience, acondition thatdidnot figure in theoriginal call for tenders.

Ontheotherhand,thepurchasecommitteehaddecidedtoinvitepublicsectorundertakingsandcooperatives,withGMPcompliance for thepurchasebidwithoutthefiveyearclause.Later, initsadvertisement,it insertedaconditionthat themanufacturermusthaveaminimumfive-yearexperience.OftheexistingPSUsandco-opsthatmanufactureAyurvedicmedicines, onlyeighthadanexperienceof fiveyearsandmore.Unlessanexperienceofminimumoffiveyearswasnecessarytoensurethelevelofqualitysoughtwhichthepurchasecommitteefailedtoadequatelydemonstrate,sucharideractedasadeterrent forentryofnewplayerswhichalsostifles innovation.

It istobenotedthatgovernmentpoliciesshouldnot interferewiththefreeand fairmarketprocessbyrestrictingmarketaccess toplayers.

The above referredBharat Biotech case referred to in Para: 2.2 isanother illustrationofprocurementpolicypracticedistortions.

5. Principle: Effective Control of AnticompetitiveConduct throughCompetitionRules ApplicationSeveral anticompetitivepracticesoccur in this sector, and these canbecategorised into threemainclasses: (i) intellectualpropertyrightsrelatedbreaches,(ii)potentialabuseofcompetitivenormsarisingfrommergers&acquisitions,and (iii) collusiveandotheranticompetitivepractices.

Anti-competitivepractices in thehealthcaredelivery systemrangefromdoctorsreceivingkickbacksfrompharmaceuticalcompanies forinfluencingdrugsales, totiedsales.Withspecificreferencetodoctors,suggestingmore tests thannecessaryandacceptingcommission forreferralsarepractices,whichmayhaveanticompetitiveimplications.Withparticularreferencetopharmacists,theanticompetitivepracticesmostcommonlyengagedinarereflectiveofcollusion.

InaCUTSstudy,themajorityofpharmaceuticalcompaniessurveyedclaimedawarenesswithrespect totheexistenceofcollusivepracticesinthepharmaceuticalindustryandahigh32.3percentofrespondents


assertedthatsuchpracticesprevail in the industry toagreatextent.Therehave been instances of cartelisation along the chain someofwhichhavebeenbroughtunder theCCIscrutiny.

Thereisevidenceofpharmatradeengaginginanticompetitivepracticesbydemandinghighermarginsfrommanufacturerswiththethreatofboycott,whichhas resulted inhigherprices for the end consumers.For instance, the pharmacists, organised under the All IndiaOrganisationofChemistsandDruggists,andsomeoftheirstatebodies,collectivelyboycottedpharmacompanies inordertopressurisethemforhighermargins in1980s.

Aside fromanticompetitiveagreements, combinationsthat threatenmarketcompetitionareamajorconcernwithsomanyconsolidationstakingplace in thepast coupleof years.

Matrix labwas acquired byUS basedMylan Inc in August 2006,DaburPharmaacquiredbySingaporebasedFreseniusKabi inApril2008,RanbaxyLaboratoriesLimitedacquiredbyJapanbasedDaiichiSankyoinJuly2009,ShanthaBiotechbyFrancebasedSanofiAventisin July 2009,OrchidChemicals (injectible business) byUSbasedHospirainDecember2009,PiramalHealthcare(domesticformulation)acquiredbyUSbasedAbbottLaboratories inMay2010.

Asanatural consequenceofM&As, there isboundtobean increaseinscaleandscopeofenterpriseactivitiesandreduction inthecostsofthe firmsmerged.However, such combinationsmay lead tohigherprices and the acquisition of generic manufacturing firms canpotentiallyleadtoawash-outofcheapergenericdrugsfromthemarket.Whatmakes thisworse is thatmost such transactionsdonotmeetthe threshold criteria laid down in theActwhich qualifies forCCIscrutinydespitehavingpotentiallyhazardouseffects.

6. Notification and Public Justification ofDeviations fromPrinciples ofCompetitionPolicyApplication: Intervention in themarketprocess toachieve social,environmentalandothergoalsmaybeentirelyappropriate.Onesuchgoalmaybetoensureaffordabilityofmedicines.

The greatest conundrum in thepharmaceutical industry is how tobalanceconsumerwelfarewithentrepreneurialinterests.Whathealthplansviewasnecessary tomaintain equitable access tomedicines,may be viewed by themanufacturers as inimical to Research andDevelopment(R&D)andinnovation.


InSeptember2010,theParliamentaryStandingCommitteeonHealth&FamilyWelfare, inoneof itsreportssuggestedaseriesofmeasureslike increasing thenumber of drugs under price control, a blanketcaponprofitmarginsofallmedicinesandpromotingtheuseofgenericdrugs tomake themmoreaffordable andaccessible to the commonman.Dr.Reddy�sLaboratoriesopposedtheParliamentaryStandingCommitteerecommendationsonincreasingthenumberofdrugsunderprice controlandplacingacaponprofitmargins forallmedicines.

Theirargumentwasthat theIndianpharmaceutical industryneedshugeinvestmentsinresearchanddevelopment.Unfortunately,cappingthepricesofdrugscutsdownprofits, therebyreducingtheavailabilityof financeanddiscouraging investment in research.That is, itwasargued that the lack of commensurate rewardswould reduce theincentiveto innovate.

AdraftNationalPharmaceutical PricingPolicywas introduced in2011whichsought tobringabout somechanges to themethodologyused to calculatedrugprices andother issues.Thedraft policy alsoproposed the decontrol of bulk drugs fromprice control. Thiswasunanimouslywelcomedasitwasfeltthatitwouldreduceourgrowingrelianceonimports fromChina.

Thereisnotyetamechanismthatstrikesthedesiredbalance.Howeverit is important that policies calling for price controlwhichhave thepotentialtoadverselyimpactcompetitionandtradebepubliclynotified,justified and implemented in a transparentmanner and not justpresumedinthe interestofmeetingnationalpriorities.


1. Laffont, J.J. (1998), �Competition, Information andDevelopment�, AnnualWorld BankConferenceonDevelopment Economics, 1998, pp. 237?57

2. It is, however, important to understand here that a framework that works for the developed worldmay not necessarily work for the developing world. But this argument has been taken up in greaterdetail in subsequent sections

3. FIASReport, 20074. Philippe Brusick andEvenett, Simon J. �ShouldDeveloping CountriesWorry About Abuse of

Dominant Power?�Wisconsin LawReview 269, 20085. OECDReport on on Promoting Pro-Poor Growth: Private Sector Development (2006)6. SimonEvenett, �Links BetweenDevelopment andCompetition Law InDevelopingCountries�, Case

Studies for theWorld Development Report 2005, DFID, UK7. Godfrey, Nick. �Why is Competition Important for Growth and Poverty Reduction�, Global Forum

on International Investment, 20088. Kee, H L&BernardHoekman, �Import, Entry and Competition Law asmarket Disciplines�,

Development Economics ResearchGroup, TheWorld Bank, 20039. The specific details on prices were obtained fromKaira, Thula (Executive Director, ZCC), �The Role

of Competition Law and Policy in Alleviating Poverty � The Case of Zambia� in �The effects ofanticompetitive business practices on developing countries and their development prospects�,UNCTAD, 2008

10. http://www.cuts-international.org/7up3/7Up3-enewsIV.htm11. J.L. Clarke and Evenett, Simon J. �TheDeterrent Effects of National Anti-Cartel Laws: Evidence

from the International Vitamins Cartel,� 200212. Stewart et. al., �Competition Law in Action: Experiences fromDeveloping Countries�, IDRC, 2007.13. In 1995 about 35 countries in the world had a competition law. Today the number has crossed 130

andmore are in the queue. The increase is entirely in the developing world. Importantly, manyincluding developed countries are also amending or revising the competition laws in light of theexperiences gained.

14. Refer http://www.competitionauthority.co.bw/, for activities of the Competition Authority ofBotswana, and to view it national competition policy

15. Refer: http://ncp.ncc.gov.au/docs/National%20Competition%20Policy%20Review%20report,%20The%20Hilmer%20Report,%20August%201993.pdf,for the report �National Competition Policy�, 1993

16. �Review ofNational Competition Policy Reforms, Australian Productivity Commission, Governmentof Australia, 2005, pg - XII

17. Mehta Pradeep S, NatashaNayak, Navneet Sharma, Saket Sharma (2012), �Infusing CompetitionThroughAppropriate Policy Responses� CUTS Institute for Regulation&Competition (CIRC)&Indian Institute of Corporate Affairs (IICA), NewDelhi, India (www.iica.in/SectorStudies.aspx)

18. WilliamW. Lewis, �Power of Productivity: Wealth, Poverty and the Threat to Global Stability,�University of Chicago Press, 2005.

19. http://ec.europa.eu/environment/enveco/economics_policy/pdf/single_market.pdf20. SupraNote21. http://planningcommission.nic.in/plans/planrel/fiveyr/11th/11_v1/11th_vol1.pdf22. Ibid

Endnotes


23. Pradeep S.Mehta (ed.), �Competition and Regulation in India, 2007�, CUTS andCUTS Institute forRegulation&Competition, 2007

24. AnneOKrueger, �The Political Economy of the Rent Seeking Society�, American Economic Review,Vol 64, No 3, June 1974

25. Gordon Tullock. �The Economics of Special Privilege and Rent Seeking�, Kluwer AcademicPublishers,Massachussets, US, 1989

26. See for example: Competition Assessment Toolkit of Korea, Best Practice RegulationHandbook ofAustralia, Guide to Competition Assessment of Spain etc.

27. http://webarchive.nationalarchives.gov.uk/+/http://www.dfid.gov.uk/Documents/publications/comp-assess-fwork-2008.pdf

28. http://www.oecd.org/daf/competition/reducingregulatoryrestrictionsoncompetition/45544507.pdf29. Chapter 4 in Competition&Regulation in India, 2007, Pradeep SMehta (Ed), CUTSCIRC30. Available at: http://www.mca.gov.in/Ministry/pdf/Draft_National_Competition_Policy.pdf31. http://findarticles.com/p/news-articles/dna-daily-news-analysismumbai/mi_8111/is_20100925/dept-

adds-riders-restricts-firms/ai_n55412840/32. http://circ.in/pdf/Civil_Aviation_Sector.pdf33. http://circ.in/pdf/Railways_Sector.pdf34. www.cbec.gov.in/customs/cs-circulars/cs-circ12/circ13-2012-cs.htm35. Report of theWorkingGroup on AgricultureMarketing Infrastructure, Secondary Agriculture and

Policy Required for Internal and External Trade for the XIII Five Year Plan 2012-17. Accessed at:http://planningcommission.nic.in/aboutus/committee/wrkgrp12/agri/weg_rep_market.pdf onMay03, 2012

36. Ibid37. http://www.financialexpress.com/news/green-implications-of-compulsory-licensing/1000252/038. www.thehindubusinessline.com/opinion/why-private-airlines-deserve-a-bailout/article2627479.ece39. www.cuts-ccier.org/pdf/CDIDossier-Oct-Dec11.pdf

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