Free markets may not create competition on their own: CEA Nageswaran

'Morality, ethics should undergird free-market economy'

Free markets do not necessarily create a competitive environment, and it is the responsibility of competition agencies and regulatory authorities to ensure such conditions, Chief Economic Advisor (CEA) V Anantha Nageswaran said on Friday. He said the implementation of certain regulations could perpetuate existing market dominance and sometimes end up harming new entrants.

“Regulators must not hesitate to intervene in order to keep markets free from entry barriers,” Nageswaran said while addressing a conference organised by the Competition Commission of India. “Competition unleashes the true potential of an economy and helps break free from the status quo... Free markets on their own may not guarantee the benefits of competition,” he said, adding that “morality and ethics should undergird a free-market economy”.

The CEA’s remarks come in the backdrop of a new digital competition law, which is being discussed by an inter-ministerial panel to ensure there is no abuse of dominance by big-tech players.

In the technology space for instance, he said, regulators implement data and privacy norms that guarantee users complete access to their data, but users can end up choosing only large players since they place a greater degree of trust in them. 

“This will ultimately lead to loss of competition across similar platforms, concentrating power in the hands of a few…Competition agencies should be mindful of the unintended consequences of their action,” he said.

The CEA also said excess competition could be undesirable in sectors such as banking, insurance, and securities, as it could create instability in these sectors. He said banking and financial services sectors were subject to norms that promoted competition among existing firms to keep interest rates fair and prevent market dominance by big institutions.

Nageswaran said regulators were often hesitant to intervene in markets. “It is not just about prices remaining competitive or displacing monopolies, competition agencies and regulators also have to keep one eye on the systemic welfare that the markets create or do not create.”

He also stressed the scope of cooperation between regulatory authorities and competition agencies. “Regulators and competitive agencies must mutually agree upon ex-ante and ex-post actions and balance the two to avoid producing outcomes that work against the action that either agency takes,” he said.

Nageswaran said competition agencies must remember that they were in “forever competition” with companies and markets.

Drawing comparison with international markets such as the US, Nageswaran said telecom, digital services, health, and pharmaceuticals sectors in the US had displayed a failure of the ability of free-market enterprises to create a genuinely competitive setting as posited by theory.