My column in Business Standard today is titled Competition policy > privatisation policy. I argue that while privatisation is the first best strategy, in a time when there are political constraints impeding privatisation, it is very important to not cut corners on competition policy. The most powerful tool for making progress on economic policy is bringing in the maximal domestic and foreign competition. There is a lot to do on competition policy which is politically feasible today, without waiting for the next general elections.
I think it is useful to put together a nuanced picture combining privatisation and competition. In the backdrop, privatisation is about obtaining GDP growth through improved productivity of labour and capital [link]. But more importantly, privatisation is a valuable means to heightened competition insofar as it helps us attain a government which is not conflicted [link] in achieving sound competition policy. But going beyond privatisation, it is also possible for men and agencies to rise above these conflicts of interest and push the competition agenda - as has happened with the best of policy makers in India in the last 20 years.
I highlight the Indian experience with mutual funds, telecom and airlines - each of which has benefited from the best of policy makers. In each of these areas, the single most important event was removal of entry barriers. In the case of international long distance, the removal of entry barriers was supported and enabled by the privatisation of VSNL. Today, the privatisation of UTI, MTNL, BSNL and the merged airline would be excellent achievements, but these privatisation events are no longer the key milestones for progress. The genie of competition and growth is out of the bottle, and this was achieved by competition policy, not privatisation policy.
The most disappointing thing about Indian banking is not the lack of privatisation. This is a decision made by Parliament, and until enough MPs are persuaded, there will be no progress on that score. In contrast, competition policy in banking is something that RBI controls, and there is no political bias in favour of impeding competition. The present state of affairs, with high entry barriers, branch licensing, and a near-ban on branch expansion by foreign banks: this adds up to a dismal state of affairs in terms of competition.