India News and Features Alliance (INFA) - Competitive Economy:INDIAN CONSUMER FINALLY BENEFITS, by Dr Vinod Mehta, 26 July 2007

Competition finally arrived and taken roots in India in the past decade-and-a-half. The advent of low cost airlines, air fares war, railways-airlines competition to attract travellers, reduction in STD and ISD rates by telecom companies and the unwillingness of manufacturers to increase prices of products are some of the indicators that the consumer’s interest is in the forefront now. Truly a welcome change.

We have come a long way since the erstwhile protectionist environment, under which the industrialists were forced to function. The heavy restrictions on imports on almost all kinds of goods and services and the licensing system for starting new capacities had ensured monopoly profits for the industrialists. This suited the industrialists as they didn’t have to make any special efforts to increase their sales. The buyers had very little option but to purchase only those goods which were available in the domestic market. The industrialists couldn’t ask for more-- low turnover but higher profits.

The thinking then was that the protectionist environment would not only ensure domestic industry growth but that scarce resources were invested in desirable areas of the economy as identified by the Planning Commission. Further, it was believed that the profits earned by the industrialists would be ploughed back to update technological base. And that after a few years India would emerge not only as a relatively self-sufficient nation but as one of the efficient and competitive economies in the world.

However, all these expectations were belied for past 40 years till the protectionist system was in command. It had three negative impacts for the domestic economy. One, the industrialists developed a vested interest in the protectionist policies. It ensured monopoly profits for them which couldn’t have been possible otherwise. As a corollary to this, the politicians joined hands with the industrialists to maintain status quo. It provided the politicians another source of earnings, by controlling and manipulating the licensing system.

Two, since the profits were assured the industrialists did not feel the need to cut production costs or to update the technological base. The market was assured of their products and they had little to do except manipulate it to their advantage.

Three, though the country needed to push up its export to earn foreign exchange, the industrialists did not find the need to look to the export market. They had already been assured that their produce would be sold in the domestic market at a much higher rate of return than what was available in the export market. This gave birth to a number of undesirable practices such as special incentives to exporters, etc.

Fortunately, a decade-and-a-half of economic reforms, after an initial opposition from industrialists and Left parties, has completely changed the scenario. The customers are now experiencing the benefits of competition. For instance take the case of the Indian Airlines. In the past it would raise airfares on the slightest pretext since it had monopolized domestic air routes. The air traveler had no option. He had to accept it despite the hike being unfair. However, there are now over five airline companies in the domestic skies, where each is careful not to lose its clients by raising the airfare unnecessarily.

Again, like the Indian Airlines, the car manufacturers enjoyed full monopoly in the domestic market. The two companies would raise the prices whenever they liked. And, got away with it simply because there was no competition. But now with the arrival of more companies in the domestic market, the car manufacturers are in no position to raise the prices at random. They realize that any unrealistic increase in prices would lead to a cut in their sales and that business could shift to their competitors.

Many more examples could be cited where competition is forcing manufacturers to constantly monitor their production cost, improve their product and control the final price. It might be noticed that prices of manufactured durable consumer goods like refrigerators, TVs, washing machines etc. are not rising as fast as the prices of other products. The answer is simple: the Indian consumer has become a king. He has a ide choice of similar goods at competitive prices which were earlier denied.

However, competition has remained limited to the durable consumer goods and/or services. In areas where there is no competition, monopoly profits exist. Most of the essential goods such as sugar, edible oil, pulses etc. fall in this category. The mills producing these essential commodities are not willing to update their technological base, which dates back to World War II. Besides, it’s well-known that these sugar mills enjoy the patronage of some politicians. Therefore, the sugar mill owners are enjoying not only monopoly profits but also being able to dump sugar of indifferent quality on the consumers.

Further, no efforts have been made to augment the supply of essential goods like the edible oil. It continues to rise in spite of the fact that its import is now relatively much easier. Regrettably, while import has a sobering effect on the price level, edible oils are relatively higher as per international standards. Thus, there is a need to make essential goods competitive in the domestic market.

But this will be possible only if the supply of these products is increased substantially so that there is a surplus in the country at any point of time. Of course, the approach for creating a competitive market in the essential goods has to be different from that of manufactured goods.

Most of the essential goods are agricultural-based and that farmer cooperatives may be more useful, especially in marketing. The idea being that not only should the farmer get a reasonable price for his produce but that the consumer too should benefit by way of lower prices. Experience of other countries in this area needs to be critically studied and adopted as per Indian conditions.

The Indian consumer will truly be a king in the essential commodities market only if goods are available at competitive prices like in the case of durable consumers industry. In the West one seldom hears of any shortage of essential commodities or any abnormal increase in prices, which by and large rise rather slowly. And, it is for this reason that the rate of inflation is below two per cent in most of the developed countries, year after year.

Therefore, it is in India's interest to take the logic of competitive economy to the agricultural sector. Essential goods too would become freely available with a wider choice like the durable consumer goods. Only then would the Indian consumer be able to feel like a king, like the American or the Japanese does in his respective markets. ---INFA.