WTO, Business Regulation & Competition in India

Indian Finance Minister at the National Law School, Bangalore

2006-08-29T23:33:00.000-07:00

National School of India University, Bangalore
Fourteenth Annual Convocation
27 August 2006

Convocation Address by
Shri P. Chidambaram, Union Finance Minister

It is a great privilege to be invited to be the Chief Guest at the annual convocation of the National Law School of India University, Bangalore. In the nineteen years of its existence, this University has carved a niche for itself and is now widely regarded as a centre of excellence. I would like to congratulate the students who will receive their degrees today from the Chancellor of the University, the Hon’ble Chief Justice of India, and to wish them all success in their future careers. I am confident that the knowledge, skills and attitude imbibed by each one of you during your stay at this University will stand you in good stead for the rest of your life.

The purpose of law
I would have loved to speak to you today on issues pertaining to law. However, I assume that you wish to hear from me on the path-forward for economic reforms. I am happy I can do both, because I believe there is a common ground between law and economic reforms. That is the most important lesson that I have learnt in my years in Parliament, in Government and as a practising lawyer. That common area of concern can be captured in one word: governance.

"Howsoever high you may be, the law is above you". Law is the great leveler in a democracy. It is the expression of the collective wisdom of the people on how they wish to be governed. Who will be the rulers? What will be the rules? Who will enforce the rules? Who will resolve the disputes? These questions should be answered by the people alone. The purpose of law is of course larger than the laws themselves. The purpose is that life should be better, society should be more civilized, opportunities should be more equal and prosperity should be shared by all. Laws are therefore intended to promote better governance; and better governance is expected to assure a better society.

The purpose of economic reforms is no different. Just as free men and women have the freedom to make political choices, they should also have the freedom to make economic choices. History tells us that only an open society and an open economy can bring rapid material progress and prosperity. We know of countries that claim to be communist or socialist, but have astutely adopted the principles of a market economy to achieve higher and sustained economic growth.

Economic Reforms, Regulation and the Regulatory Architecture
The year 1991 marked a watershed in India's economic history. Although some tentative steps were first taken in the 1980s, the defining moment came when the Budget was presented by Dr Manmohan Singh in July, 1991. Since then, gradualism has been the order of the day in ushering in economic reforms. Gradually, but surely, India moved away from a dirigiste economy.

A major wave of liberalization swept through the economy, starting from the industrial, trade and financial sectors. The earlier license-control raj was abolished and a bigger role was assigned to market forces in driving the economy. The focus of policy making shifted from control to facilitation, and it aimed at providing a conducive and congenial environment in which industry, trade and services could grow.

Globally, the current dominant paradigm of economic development places greater reliance on market forces to achieve higher rates of economic growth. Many developing countries have introduced market-based economic reforms to reap the benefits of globalization. The Indian economy too is being integrated, gradually but increasingly, with the global economy through trade, investment and capital flows. Moreover, further deepening of reforms is taking place in the financial sector, agricultural sector and the overall regulatory architecture. More focus is being put on issues of governance and institutional development.

However, it should be noted that governance and institutional development are dependent upon capacity and competence. We have found that in many areas there are grave deficiencies in our capacity to deal with the matter at hand. For example, execution of major projects is considerably delayed resulting in time overruns and cost overruns. Of 742 projects each of a value of Rs.20 crore or more, 269 are still in different stages of implementation with time overruns ranging between 3 to 252 months and cost overrun of Rs.30,420 crore. In other areas too, we have found that we lack competency and skills of a high level and we have to either outsource the work or induct talent from outside. Our capacity to draw up model concession agreements, to do project appraisals, and to evaluate bids in the case of complex tenders is quite limited. Normally, these limitations do not arise because of a lack of technical expertise such as expertise in engineering or accountancy. The most notable deficiencies are in the areas of documentation, financial appraisal, risk analysis and distribution, and dispute resolution. Where international bids are invited for a large project, we have found that we have to depend upon outside experts to draw up the financial and legal documents.

Likewise, there are deficiencies in the regulatory architecture. Regulation in a broad sense can be defined as the operational manifestation of statutory provisions and institutions of enforcement within which all units in a specified sector must function. Regulation is motivated by the objective of resolving the conflict between the commercial goal of maximizing profits and the interests of the people using these services, in areas where normal market processes are believed to have a high likelihood of market failure. Regulations are the rules of the game framed by, or under the authority of, a sovereign government. But, like FIFA regulations in the case of professional soccer, regulations must and do have a close association with ethics.

Regulation can be divided into two parts: the standard procedures such as registering a business or obtaining a business license and those procedures that are mandated by independent or autonomous regulatory agencies created under law. The key difference between old-style control by government ministries and the new-style, independent regulators is that the latter have quasi-judicial powers; they are constituted and operate, at least in theory, at an arms' length distance from the rest of government; and they have special domain knowledge.

Along with policy reforms, India has been on an ambitious path of building or restructuring institutions. This is particularly striking in the regulatory arena. Regulations in banking, commodity futures markets, capital markets, insurance, telecommunication and power are now in place and reasonably well established. Others, in the area of competition policy, pension etc are at different states of formation, and still some more (petroleum, civil aviation, railways) are under consideration. The list is a long one, and is expected to grow longer.

The role of the State in India has simultaneously been sought to be redefined, and is evolving in consonance with the economic reforms. The State’s foremost obligation is to provide public goods such as security and law and order. Among the duties of the State is the duty to enforce the sanctity of contracts and generally facilitate the economic agents to perform their functions. The State has moved away from occupying the ‘commanding heights’ of the economy to being a ‘facilitator’ for growth. It is not that the economy can do without the State; the State is certainly required to provide the right environment and architecture in which the economy may grow.

Contracts and enforcement thereof
One of the most important features of a modern market economy is the primacy accorded to contracts including the freedom of contract, the sanctity of contracts, their enforcement, and dispute resolution. The obstacles that contracts face are numerous and well known. For example, Governments tend to limit the freedom of contract, market forces resent such limitations. The contracting parties strain to find ways and means to avoid their obligations. Sometimes, Government steps in to overturn concluded contracts by changing the law. Enforcement of contracts may turn out to be tortuous and sticky, virtually destroying the sanctity of the contract. On failure of enforcement, when the parties resort to dispute resolution, it may turn out that the resolution of the dispute itself becomes highly disputatious. We have found that the comfort level of domestic and foreign investors is directly proportionate to the sanctity of contracts. I am convinced that, in order to be a globally competitive economy, it is essential that the sanctity and enforcement of contracts in India must meet the highest global standards. Hence, the public goods of law and order and enforcement of contract are a central part of the infrastructure of a modern economy.

India started with the English ‘common law’ tradition, where laws were written in terms of general principles and courts played a major role in interpreting the principles in the light of contemporary issues. Over time, this common law legacy became less important, and the structure of India law moved closer to ‘civil law’, where legislation contained explicit detail and extensive codification.

There are over 3,500 Central laws in force. There may be 25,000 to 35,000 State laws. In addition, there is a substantial body of subordinate legislation. A single collection, putting all these together on one website, does not exist. The agenda for legal reforms in India, in my view, comprises five aspects.

Old laws: There are laws that go as far back as 1836. Elements of legislation that play a major role in the economy go back to the 19th century, such as the Societies Registration Act (1860), the Indian Evidence Act (1872), the Indian Trusts Act (1882) and the Transfer of Property Act (1882). Old laws tend to have clauses that are incompatible with a modern economy. The Jain Committee identified 1,300 out of 3,500 statutes for outright repeal. Of these, approximately 350 were repealed in recent years. The real complexities lie in the areas where outright repeal is not possible.

Harmonization and rationalization: As an example, there are 45 Central Acts that directly pertain to labour. Beyond this, there are other Acts that indirectly concern labour. Given this large body of law, many inconsistencies have crept in and require to be ironed out.

Reducing over-legislation and State intervention: To cite an example, the Weekly Holidays Act of 1942 and the Shops and Establishments Act of 1948 require that every shop or establishment must be closed for one day in a week. This is inconsistent with the 24 hours a day, 365 days a year vision of modern retailing or call-centres. The Factories Act requires that all inside walls be re-painted or re-varnished at least once every five years. These kinds of detailed prescriptions are inconsistent with the process of economic reforms which requires the State to refocus on the provision of public goods.

Administrative law reform: Difficulties in the matter of ensuring transparency and public disclosure have been experienced in the context of rules, orders and regulations that form subordinate legislation. A related aspect is greater clarity and establishment of State liability when the State or agents of the State, including a regulator, inflict damage upon a citizen. We have not yet addressed the issue and the consequences of regulatory failure.

Speed of dispute resolution: The number of judges in India is roughly 10 per million of the population, while OECD countries have 50 to 100 judges per million of the population. There are about 23 million cases pending in courts and the backlog continues to grow. Productivity improvements need to be implemented in all courts. At the same time, it is necessary to put in place a sound alternative system of dispute resolution, especially for commercial disputes.

I am sure that the young graduates of this prestigious institute will do their best to improve the legal architecture of the nation in order to improve governance at all levels. You have chosen law as you career. There is no aspect of life that is not touched by some law or other. When you walk on your career path, whether you advocate the law or apply it or interpret it or make it or unmake it, kindly bear in mind that you will affect the lives of one or more people for better or worse. Hence, it is worth repeating the injunction, "Howsoever high you may be, the law is above you."

My best wishes to all of you. Thank you.

“You Can Win, But I Never Lose”?: Doordarshan, Cricket Telecast and Competition in India

2006-08-18T23:51:00.000-07:00

The ongoing (and ostensibly never-ending) controversy about the telecast rights for India – Pakistan cricket series is redolent of short-sighted approach towards understanding of the gamut of issues involved. The nub of this piece is to argue that the property rights related to telecast of cricket ought to be left to the forces of market competition, as long as a level playing field is ensured in the initial allocation of the rights.

To begin with, we need to grapple with fundamental issues – what is so distinctive about cricket? And, what exactly are cricket telecast rights? Way back in 1995, Justice P.B. Sawant in the case of Cricket Association of Bengal had found that “the game of cricket is by far the most popular in all parts of the country. This is evident from the over-flowing stadia at the venues wherever the matches are played and they are played all over the country. It will not be an exaggeration to say that at least one in three persons, if not more, is interested in viewing the cricket matches.” Though Justice Sawant did not collect any statistical evidence, and he spelled out that “this is not a deficiency felt only in this arena”, nevertheless, he enjoined that “it cannot be denied that a vast section of the people in this country is interested in viewing the cricket matches”. Even if one concedes that cricket is indeed popular, would this really transmute the nature of cricket telecast rights as property rights that ought to be subject to market competition?

The cricket telecast rights are typically the property rights over signals to air the cricket matches so that interested viewers may have access to their favourite sport. Do telecasters act in charity? Of course not. When telecasters air the matches, they intersperse them with advertisements of a mélange of products, so that they can earn revenues. In the good old days, when Doordarshan had effective monopoly over telecast of cricket, it took the revenue earning potential of cricket matches rather too seriously. More often than not, Doordarshan used to black out the first and last balls of an over so that it could maximize the time slots available for carrying out advertisements!

Despite being short-changed, why weren’t consumers up in arms against Doordarshan? Besides wielding highly diffused power, there was an absolute lack of choice. The available state of technology acted as a humongous entry barrier and ensured that barring Doordarshan no one else had the wherewithal to carry out telecast of cricket. The Board of Control for Cricket in India’s (BCCI) hands were tied as well – unless matches were accessible to the mass of viewers, they too stood to lose vast sums of their investments.

Things changed with passage of time. By early nineties, technology was sufficiently advanced to ensure that cricket telecast no longer remained dependant upon the magnanimity of Doordarshan. Nonetheless, when BCCI awarded the telecast rights to ESPN, Doordarshan indulged in arm-twisting to thwart nascent competition. Since then, telecast rights of cricket have perpetually remained mired in controversy. The real battle, nevertheless, has shifted to courts who willy-nilly don the mantle of umpires in the game of telecast rights. The latest in the saga is the ongoing India-Pakistan series being played in Pakistan.

Interestingly, a marked improvement in transparency of the tender process has been a remarkable concomitant development. By and large, a level playing field is available. For instance, Doordarshan could have easily bid for telecast rights of the present India-Pakistan series. When they chose not to exercise the option, should the courts, ex post, alter the contract in favour of Doordarshan? An endeavour for acquisition of property rights requires effort, planning and investment. If a rival could undo what a player achieves through superior skill, merely by piggybacking the courts, it would act as a huge disincentive for the players to compete. This hurts the process of competition, which ensures that market rivalry as an organizing principle for economic activity remains robust and effective.

Courts ought to intervene only when overriding public interest is involved. Popularity is hardly the yardstick for public interest. A free access to the blockbuster Rang De Basanti might as well be a popular demand, however, that cannot possibly justify the courts granting rights to Doordarshan to telecast it. When you play the game, you should be prepared to lose. As the clichéd phrase goes, the importance lies in participation. If someone wins, but you refuse to lose, your victory in avoiding loss might be Pyrrhic. In the ensuing cricket series, if no company finds it worthwhile to place a bid and God forbid, Doordarshan’s atavistic instincts reign supreme we might have to bid adieu to first and last balls of an over, superb commentary skills and an in-depth analysis of the game!