Shri Narendra Modi
Shri Narendra Modi
Prime Minister of India
International Trade
Working Group on the Interaction between Trade and Competition Policy – Communication from India

WT/WGTCP/W/110 16 November 1998

Working Group on the Interaction between Trade and Competition Policy



The following communication, dated 22 September 1998, has been received from the Permanent Mission of India with the request that it be circulated to Members.

The Impact of State Monopolies, Exclusive Rights and Regulatory Policies on

Competition and International Trade

(This paper is based on the intervention made by India on the impact on trade and competition of State monopolies and of institutions that have been granted exclusive rights, in the July meeting of the Working Group.)

  • State monopolies and exclusive rights have played an important role in key sectors, particularly in developing economies. Governments have often granted special or exclusive privileges to designated enterprises so as to provide universal supply of a service to all citizens on specific terms and at affordable prices. In a country like India, essential services like the railways, the postal service, supply of electricity, national highways, etc., have been for long operated by State monopolies. This has ensured that development in these capital-intensive areas is uniform throughout the national territory, a given quality level is maintained and the entire nation serviced irrespective of economics of operation. It is therefore evident that State monopolies do have an important role, particularly in developing economies where market forces are still in their infancy. This is particularly true where the services are still being inducted into social life and a conscious push is required to increase their usage for the welfare of the people. The benefits of State monopolies, especially in the core sectors and strategic sectors, would therefore appear to outweigh some of the disadvantages, which might accompany State intervention.
  • However, notwithstanding the important role that State monopolies have played in developing economies, it is a fact that there is a direction towards increasing deregulation and demonopolization. In fact, even in India in sectors such as power generation and telecommunications, which had traditionally been reserved for the State sector, there is an increasing move towards privatization. This obviously would be true for many other developing countries also. Moreover, with the growing complexity of the industrial structure and the need for achieving economies of scale for ensuring higher productivity and perhaps a competitive advantage in the international market, there has also been a simultaneous thrust on deregulating State monopolistic trade practices. In India, the trade practices of all undertakings either owned or controlled by the Government, except certain strategic sectors related to Defence etc., are subject to the provisions of the Monopolies and Restrictive Trade Practices Act (MRTP Act). Thus, in principle, very few commercial sectors of the Indian economy have been excluded from the application of anti-trust disciplines. By regulating the trade practices of State monopolies, there is a specific endeavour by the Government to ensure that the right balance is struck between what are the visibly distinctive and advantageous features of State monopolies and the perceived negative aspects of such enterprises. Social and political objectives of regulatory policies could at times appear to contradict the objectives of trade policy, especially if the regulatory policies were the result of deeply held national commitments. A case in point could be an equitable development of all regions of the nation, and the need for infrastructure and servicing expenditure on such commitments. So long as regulatory policies in such cases are transparent and predictable and due process and regulatory neutrality is ensured, regulations may not only be necessary but advisable.
  • The argument generally adduced for increasing the pace of demonopolization is often linked to the presumed inefficiency of State monopolies on the grounds that they do not have any incentive or market compulsion, primarily because of lack of competition, to produce at the most efficient level. It is stated that the goods or services supplied by State monopolies are consequently more expensive, which in turn adversely affects the competitiveness of the economy as a whole. While this simplistic assumption of the working of State monopolies in a market economy may be correct to a certain extent, it is our view that these two facets, i.e., efficiency and equity, are not necessarily mutually exclusive social goals. One manner of looking at this is that the efficiency facet can be related to the public interest and the equity facet to the consumer interest. This would suggest that there is service of the public interest in the efficient use of a resource or in obtaining economic or technical efficiencies, while there is service of the consumer interest in the equitable supply of goods and services.
  • It needs to be recognized that developing countries do not usually have the same well-functioning market economy dynamics as that which exists in developed countries. The less developed an economy, the more the likelihood of market failures. Hence, for such countries that are susceptible to instances of market failures, it would not be prudent to rely only on the dynamics of competition, especially if the sectors involved are critical. Hence, while the objectives of introducing competition and deregulation of State monopolies have some merit, it is important to provide a certain degree of flexibility to developing economies so that they can pursue this path at their own pace. In fact, the World Investment Report of 1996, while observing that globalization will have pervasive consequences for the development prospects of all countries, in particular those of developing countries and economies in transition, specifically suggests that the development objectives should be safeguarded by allowing countries in need of a transition period the time to adjust to such changes through exclusions, exemptions and other temporary measures.
  • Views have been experienced about the need to ensure market access in sectors subject to widespread government regulations and/or where enterprises have been granted special or exclusive rights. While issues of market access are no doubt important, we do not feel that while examining the trade effect of State monopolies and of those enterprises which have been granted exclusive rights, these are the only issues to be addressed. As stated earlier, State monopolies have played an important role in economies of developing countries. Apart from being major employment providers, they have also fulfilled an extremely important socio-political role. Thus, while there is no doubt that competitive practices would need to be introduced in all sectors and that competition would need to be promoted through privatization and demonopolization, this would necessarily have to be a gradual process. Apart from the fact that the State has to fulfill its obligations by ensuring social equity, it also needs to be recognized that deregulation of any traditionally reserved sector is not without its political connotations, particularly in view of the large-scale employment provided by State enterprises. Hence, decisions regarding demonopolization have to be taken in the context of these realities. Another factor is that only such competition measures may be addressed multilaterally which have a significant impact on trade and a similarly high impact on possible discrimination between domestic and foreign suppliers. Clearly, much more analysis may be required to identify issues of concern in these areas.
  • Before concluding, we would like to state that to a certain extent the existing WTO provisions, particularly those relating to the activities of state trading enterprises, already provide a certain mechanism for monitoring the activities of enterprises which have been granted exclusive rights by governments. While there would no doubt be areas where the current framework of WTO rules may not provide adequate coverage, we feel that it is still too early to draw any conclusions on the need, if any, to complement the current WTO disciplines.