[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
Survey of India, which was released in
October 2007, to briefly assess two areas
in which regulation could be made
more supportive of competition and private
sector involvement: the business
environment in markets for goods and
services (henceforth referred to as the
product market) and labour markets.
This work is based on field work in
twenty one states that has enabled us to
construct cross-state indicators of regulation
in product and labour markets.
There are other areas where government
interference is also high, such as
the financial and energy sectors, and
areas where large subsidies are paid.
Our views on these areas can be found
in the Survey.
Despite Liberalisation, Product
Market Regulation Could
Still Do More To Support
Competition
Figure 1. Product Market Regulations: An International Comparison
Australia
UK
Iceland
US
Ireland
Denmark
New Zealand
Canada
Sweden
Luxembourg
Japan
Finland
Belgium
Netherlands
Austria
Slovak R.
Germany
Norway
Korea
Portugal
Spain
Switzerland
Grance
Czech R.
Greece
Italy
Brazil
Hungary
Mexico
Chile
Turkey
Poland
INDIA
number of barriers that do limit private
sector involvement and competition in
markets.
PSEs for 14 % of GDP, rising to 22 % of the non-agricultural
business sector and an even higher share of activity
in the formal sector of the economy. Many of the sectors
in which they operate are inherently competitive
OECD
Average
0 1 2 3
The indicator score runs from 0-6 from least to most restrictive of competition
4. Overall, product market regulation in
India restricts completion to a greater
extent than in all OECD countries and
both Brazil and Chile (Figure 1). This
is despite some aspects of India’s regulatory
framework in product markets
being comparable with best practice in
OECD countries. For example, formal
legal barriers to market entry have been
removed in almost all sectors and there
is minimal government interference in
the conduct of private sector firms
through, for example, price controls and
special voting rights (notwithstanding
restrictions on the voting rights of private
shareholders in government-owned
banks). There are, however, still a
The Public Enterprise Sector Is
Large And Distorts Competition
5. A high level of government involvement
in commercial activity is one important
reason why India’s business
environment is less supportive of competition
in comparison to other countries.
Overall, public enterprises account
for 14% of GDP, rising to 22% of
the non-agricultural business sector and
an even higher share of activity in the
formal sector of the economy. Many of
the sectors in which public sector enterprises
(PSEs) operate are inherently
competitive.
6. PSEs have a negative effect on the
business environment for a number of
reasons. First and foremost, because
government plays the dual role of major
market player and policy maker (and
sometimes regulator in infrastructure
sectors), there is often no clear separation
between the ownership function
and other functions that influence market
conditions. For example, PSEs are
often required to fulfil social and public
policy obligations with their governance
adversely affected by political interference
and the use of civil servants as directors.
Moreover, in many states the
strategic commercial choices of PSEs
often have to be cleared by the state assembly.
Finally, the procurement poli-
THE INDIA ECONOMY REVIEW
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