Innovation can lead India to forefront of competition: CEA Subramanian

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New Delhi: Chief Economic Adviser K.V. Subramanian said that if this century has to belong to India then innovation has to be at the forefront. Therefore, competition policy in the context of innovation becomes really critical. He said these in his keynote address at the 4th edition of national conference on ‘Economics of Competition Law’ organised by Competition Commission of India here today.

Shri Subramanian also advocated for deterrence as a tool to make defaulting companies fall in line with set guidelines and follow pro-market behaviour. Deterrence is crucial for encouraging pro-market behaviour, he said citing an example of the Insolvency and Bankruptcy Code (IBC). The fear of defaulting companies to be brought under the IBC compelled many of them to voluntarily approach the banks and pay up, he said. IBC has catalysed the recovery of around Rs 3 lakh crore from various default cases, directly or indirectly, since its inception in 2016.

Explaining the link between competition and innovation, the CEA said that in a perfectly competitive industry firms will only be able to price their products to the marginal costs. If they are pricing to marginal costs then there isn’t enough profit to be made. In a perfectly competitive market price has to be equal to the marginal costs. If the industry is expected to be perfectly competitive then no firm in that industry will have enough incentive to invest in innovation because the returns are not adequate. He also said that the other extreme of monopoly also doesn’t lead to innovation. Shri Subramanian said the sweet spot for more innovation is actually a moderate level of competition. If there is extreme competition, you don’t get innovation. The CEA said that perfect competition doesn’t lead to more innovation. The higher the competitive pressure, the greater seems to be the innovation.

Pressing upon the need for competition policy to account for the specificities of the sector under consideration, Shri Subramanian said there are some sectors where perfect competition does not provide best outcomes. Competition policy, therefore, needs to be assessed sector by sector. The most important thing that the authorities need to be thinking about is the optimal industry structure for that particular sector.

Shri Subramanian also pointed out that product market competition needs to be complemented by competition in factor markets, viz. market for finance and market for research. Deep financial markets are critical for funding of new ideas. When new firms challenge incumbents, they innovate to avoid being “creatively destroyed”.

He pointed out that proportion of credit, though not the magnitude, flowing to smaller firms has shrunk over the last decade, which needs to be addressed through enabling regulatory framework. Effective competition in product markets and factor markets is important for fostering innovation in the Indian economy, he said, adding that this in turn will generate more jobs, encourage entrepreneurship and promote growth.

Referring to policy making, Shri Subramanian said policies should be such that it promote moderate level of competition for promoting innovation. He added that there are no incentives for promoting innovation in perfectly competitive market and even when the competition is low.

Shri Ashok Kumar Gupta, Chairperson, CCI, in Special Address, emphasised that the necessity for an enforcing authority to frame its guiding policy in a clear and transparent manner. The discipline of economics can help in providing the much needed clarity and transparency. Further, he emphasised that competition is an economic law and most modern competition law regimes have economic goals, such as promoting economic efficiency and consumer welfare. He also stressed on the fact that economic analysis have to help in building legally robust cases in CCI’s decisions as these are subject to further judicial review. It makes it important that the economic analysis used in cases is comprehensible and that it fits well into the legal framework. Shri Gupta also informed the audience that the commission has initiated a market study in the e-commerce sector to understand the evolving competition landscape.

In her opening remarks earlier, Dr Sangeeta Verma, Member, CCI, emphasised that markets are changing rapidly and the application of the law also has to keep pace, especially in the wake of digital space, Big data, Artificial Intelligence, Internet of Things, machine learning altering the market dynamics. She also pointed that this conference is an attempt to bring theory and practice closer, to reconcile legal principles to economic rationale and above all to have exchange of ideas.

The national conference, in addition to this inaugural session, had two technical sessions where researchers presented 6 papers on economics of competition law, a special session on contemporary anti-trust issues and a plenary on digital markets: anti-trust and beyond. The national conference was attended by policy makers and advocates besides global participants from Europe and America.