Also, he advocated for deterrence to make defaulting companies fall in line with set guidelines and follow pro-market behaviour.
"Innovation is so important in today's economy. If...this century has to belong to India then innovation is something that we have to focus on. Therefore, competition policy in the context of innovation becomes really critical," he said at a lecture organised by Competition Commission of India (CII) here.
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.
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.
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.