Enabling competition

India must encourage entry of firms and innovation

The latest Monthly Economic Review (MER) from the Ministry of Finance makes an important distinction about what India needs next. It notes that even though the economy remains buoyant, investors are cautious because trade tensions, tariff pressures, geopolitical risks and higher global interest rates are affecting the outlook. India, therefore, cannot take its recent growth performance for granted. Only the right policy environment can encourage investment. In this regard, the MER notes that India must become “more competition-friendly rather than business-friendly”. Only a competitive economy, it argues, can become successful and innovative. Attracting investment and making it easier for businesses to operate are necessary, but they are not sufficient. A business-friendly regime can lower costs and speed up approvals. A competition-friendly economy goes further. It ensures that firms face competitive pressure to improve productivity and quality. For instance, a 2010 International Monetary Fund (IMF) study, using firm-level data across countries, found that competition-enhancing product-market reforms accounted for 12-15 per cent of productivity growth in countries. Meanwhile, a more recent IMF assessment of India argues that weak business dynamism and subdued competition are holding back productivity. It notes that subdued dynamism tends to affect the reallocation of resources towards more productive firms. 

Manufacturing is a good test. The MER, for instance, notes that electronics production more than doubled in five years to 2025-26 and exports rose about fivefold, with smartphones becoming India’s largest exported product category. However, most components are still imported and the domestic supplier ecosystem remains incomplete. The next challenge, therefore, is not merely to attract more factories but to deepen backward integration, supplier networks, and increase domestic value addition. Indian products need to be more competitive in global markets. However, competition in the economy cannot be left only to the Competition Commission of India’s (CCI’s) enforcement after a market has already become concentrated or a firm has abused its position. Government policies themselves shape market structure through licensing, procurement, subsidies, tariffs, localisation requirements, access to infrastructure, and sectoral regulation. A policy intended to support domestic capability can build competitive firms, but if poorly designed, it can also protect incumbents from competitive pressure. India has had a draft National Competition Policy since 2011, but it has never been formally implemented. The Parliamentary Standing Committee on Finance last year reiterated the need to implement such a policy and to improve coordination between the CCI and sectoral regulators. It is well known that it is relatively easy for large businesses to operate in India than it is for small and new entrants, partly because of complex regulations that attach a premium to access and the ability to get things done. This is one of the reasons large conglomerates are expanding into multiple areas, potentially affecting the entry of more dynamic and smaller firms.  This needs to change if India is to achieve higher sustainable growth. 

The success of several policies, including production-linked incentives, component schemes and semiconductor programmes, should ultimately be judged by whether the sectors that get support can achieve scale, productivity, technological depth, and export competitiveness without requiring permanent protection. The same principle applies beyond manufacturing to aviation, infrastructure, energy, finance, telecom and digital markets. Thus, being competition-friendly requires better regulation, stronger institutions, policy consistency and state capacity. India now needs to move from business-friendly to market-friendly policymaking.