1. Competition: A potent tool for Economic
development and Socio - Economic welfare
(Wordcount : 2702)
∗
Ekta Grover
Masters in Quantitative Economics,
Johann Wolfgang Goethe University,Frankfurt
29th June, 2012
Introduction
Competition, as in the words of Friedrich A. Hayek1 ”is essentially a process of the formation
of opinion: by spreading information, it creates that unity and coherence of the economic
system which we presuppose when we think of it as one market. It creates the views people
have about what is best and cheapest and it is because of it that people know at least as
much about possibilities and opportunities as they in fact do”.
It is therefore, as a by-product of this process of ”formation of opinion” ; and in an
attempt to achieve Economic efficiency which this process demands - that it filters out the
firms in the Business landscape of a country, thus creating sustainable, structural founda-
tions2 where Socio-Economic welfare of a society can prosper. According to a huge array
of academic literature3 , for every job created in the organized sector, an average of 2.5 jobs
are created in the supporting unorganized sectors. This means that Competition not only
accelerates the growth in GDP, but also helps in creating social parity - something that can
be argued from both sides of the table. By having positive spillovers in the market forces of
demand-supply of labor, it necessitates trans-generational investment in the Human Capital
- thus facilitating a long term transition into high-income groups. Looking at the historical
trends of Competition in the developing countries, we see that competition brings with it an
∗
ekta1007@gmail.com
1
Hayek Friedrich A.(reproduced, 2010), Mises Daily, ”The Meaning of Competition”
2
which I will systematically describe later in this essay
3
Steven J. Davis, John C. Haltiwanger, Scott Schuh,(1998) ”Job Creation and Destruction”, MIT Press
1

2. increased flow of technological knowhow and global best practices, which when assimilated in
the host-country’s benchmark practices, further strengthes the political sovereignty, thereby
creating a blue-print for a long term economic development.
However, with all its positive implications and spillovers on the overall the socio-economic
welfare, Competition can at the same time also create Social disruptions due to accelerated
commercialization4 especially in ”Virgin Markets”, markets that the West recognizes as the
Emerging and the Developing economies. This is particularly true of extractive and heavy
industries, and can have far reaching consequences for the indigenous firms, and the SME’s.
Competition, especially when it comes with an onslaught of an unprecedented dependence on
FDI, increases the dependency of a Host country on Foreign capital, and if unsustained, can
pose a great risk of ”Hard Landing”5 of the Economy - thus creating a need for sustainable
Business practices, Regulatory reform and need for Institutions such as CCI, which serve as
a vanguard for healthy-prospering markets.
The questions then is not about the ”Shades of Grey” that competition brings with it-
self, but the long held debate on the rule per se vs. rule of reason, which should be seen
as a manifestation of moral responsibility and a calculated judgement, philosophical if you
would - which is why we now agree on a international scale that Competition law is indeed
dynamic - and that merely promoting economic rivalry, or stifling monopolies is different
than promoting growth and consumer welfare in the economy.
In the rest of the essay, I will touch upon both sides of the competitive rivalry. Throughout
this essay, I will try to enunciate this ”thin line” between the efficiency and wherever possible
shall cite accepted Research evidence, Quantitative trends and Business cases to elaborate
my thoughts. I will link these ideas to the contemporary Business landscape in India in the
context of MNC’s, FDI and National Champions - making a case for an evolving competitive
landscape.
The benefits of competition in markets
The benefits of competition in markets are manyfold - all of which build on top of each
other, creating structural foundations which weave together what they couldn’t have other-
wise achieved when operating in ”Business silos”.
4
OECD report,available at http://www.oecd.org/dataoecd/47/51/1959815.pdf
5
Wikipedia : Hard landing in the business cycle is an economy rapidly shifting from growth to slow-
growth to flat as it approaches a recession, usually caused by government attempts to slow down inflation.
2

3. Competition in markets gives more choice and a greater basket of services at the disposal
of the consumer - which brings the price-point down, thereby increasing the consumer sur-
plus. This forces the businesses to evolve their products and services in an attempt to stay on
the forefront of the competition. In the Indian context, this led to innovative in ways to serve
the consumer, and more product differentiation. Most of these innovations were borrowed
from the developed world, which helped increase social parity and advancements compared
to the West, while at the same time, tailoring the Indian-model with ”frugal innovation”.
This was especially true of the telecommunication sector, which adopted non-linear pricing
tariffs, value added services(VAS), and advanced services such as 3G and 4G - that by pro-
viding the basic infrastructure, further sparked innovation in other sectors, primarily mobile
Health care and Education - thus creating positive spillovers in seemingly unrelated sectors.
To increase the margins in cut-throat competition, some of the very competitive Indus-
tries/Sectors have gone so far to carve out a new customer base and market segmentation
- this is particularly true of Micro Finance and Micro Insurance sector, effectively bringing
services to the bottom of the pyramid who wouldn’t have been served otherwise. The Total
Microinsurance market in India is about $1.56 billion, with pensions for unorganized work-
force6 upto $2.5billion. Localised Community Based Health Insurance such as CBHI (Mi-
croInsurance, Health), Private-public partnerships such as ICICI Lombard and United India
Insurance (livestock insurance), Invest India MicroPension (IIMP), Agro advisory services &
Financial-Credit Risk Institutions such as BASIX and WRMS7 - are some of the major play-
ers that have helped scale up this micro-market. The good news is that Multinational players
such as Swiss-Re, ICICI, IFFCO-TOKIO are coming together in this competitive landscape
to achieve what had initially been an in-competitive state monopoly of LIC and UTI trust
India, thus fundamentally altering the business landscape and carving out a new segment in
the bottom of the pyramid. What’s more, the selling margins8 in India are lower compared
with other emerging markets by about 25% - which strengthens the socio-economic welfare
of the consumers at the bottom of the pyramid, while allowing for an all inclusive growth,
bolstering structural foundations of the social parity I mentioned earlier in the introduction.
Since competition forces the businesses to optimize what can be achieved with given fac-
tors of production this leads to allocative efficiency and highlights our resourcefulness and
love for frugal innovation, together as a nation.
6
both statistics per year basis
7
Source: IFMR research - For credit linked products, market based financial institutions like corporate
banks and community based financial institutions like MFI-NGOs and co-operative banks are used as delivery
partners.
8
Source: McKinsey(2010), India Pharma 2020 Propelling Access and Acceptance, Realizing True Po-
tential
3

4. Having healthy competitive markets, when combined with strong founded respect for
innovation and Intellectual property, helps convey a robust image on a global landscape -
which helps in bringing more technologically intensive solutions and attracts international
research projects. This helps increase the productivity of the factors of production, the
capital and the labour, and in this process achieves dynamic and economic efficiency. To ex-
emplify, the Biotechnology, Contract Research and Pharmaceutical are some of the leading
sectors that have thrived on competition the markets - and evolved in many-fold dimen-
sions. For instance - in spite of many fundamental differences with the WTO negotiations,
India scaled up9 it’s efforts to comply with the TRIPS(Trade-Related Aspects of Intellec-
tual Property Rights) agreement in the WTO Doha round, with its Patents Amendment
Act, 2005 and implemented a product patent regime in the pharmaceutical sector. These
are positive developments that go hand in hand in grooming this ecosystem for the overall
public good of the citizens. Such developments, often coupled with competitive FDI poli-
cies have helped the developing and emerging countries have trans-generational change in
the business practices, labor skills and knowhow, thereby pushing the whole market, upward.
This is glaringly true of the Indian Miracle story - and its implications for the national
champions and the PSU’s since the economic liberalization of 1991. Competition, and in
some cases privatization which often comes along in an attempt to scale up and augment to
the Governmental and State institutions, is thus, guided by the goal of achieving economic
efficiency. If we believe in the efficiency of the markets to some extent, this process helps
create ”Public Good”, especially in sectors that are highly capital intensive, eg Petroleum
Exploration, Heavy Industries, Manufacturing, institutions for sustainable Human capital.
This creates a ”clustering effect” for other sectors that can build on these foundations, when
basic utilities and infrastructure are provided for.
Having more competition also ensures that the businesses pay competitive wages, and
invest in their skill sets and productivity-quotient. This, in turn increases there allocative
efficiency and social parity, and the GDP - but this has traditionally been true only of the
organized sector, and not so much of the unorganized sector. I will cover the other side of
the economic rivalry in the next section.
9
Latha Jishnu: Policy of encirclement(2009), TRIPS and India, Rajdeep Joyeeta(2008)
4

5. Towards the concept of Workable Competition - when
does economic rivalry gets it wrong
While competition creates a positive spill over effect for the supporting unorganized sectors
- it comes with its shades of grey. Competitive industries usually create around itself the
hubs, or clusters of unorganized sectors. It is the lucrative promises of quality of life in
these hubs, that it can create social disruptions such as migration to high-potential cities,
something that has been particularly true of Mumbai, Bangalore and Gurgaon. With the
flocking of man-power, there is a race for the natural resources, which strains our environ-
ment. Often, this migration leads to a move of the workers to a more competitive sector,
especially if the barriers to learning these new-skills are low. Part of the story is a systematic
move into higher income groups, yet part of it is what would classify as unsustained growth.
Consider for example10 , since 1970-71, the sectoral share of agriculture in the GDP has
declined consistently, while the share has raised consistently in the services and industry
sector. As I mentioned before, part of it was a planned move into higher income groups, yet
the agriculture sector in India poses a fundamental question, which is - whether competition
is a zero-sum game. Looking at the trends of the share of the agriculture in country’s GDP
we find11 that compared to 1950-51, with a share of 56.5% in the GDP, the share has declined
each year since. In 2007-08 it accounted for 18.51%, 2008-09, 16.4% and in 2009-10 making
up for a mere 15.7%. Putting it into perspective, this means that as of 2009-10, 58.2% of
our workforce adds to a mere 15.7% of the GDP. This calls for a dire need to innovate in
sectors, which makes up the back-end of the competition. In that sense, Competition begets
Competition - with competitive sectors getting a more than fair share of the Innovation and
Sectoral reforms than the Industry average. This is why the focus should not be only on the
”relevance of the markets”, and the ”abuse of dominant position”, but also to create a level
field for an all-inclusive growth - even if creating this level field, requires ”artificial nudges”12
in the ailing sectors. This necessitates that the fiscal policy and labor reform go hand in
hand, something that requires close contemporaneous monitoring of the macro-economic
trends.
Now I will focus on a more fundamental concern: Cut-throat competition in markets.
10
Source: National Accounts Statistics 2010, Central Statistical Organization, Ministry of Statis-
tics and Programme Implementation, Govt. of India ,High-Value Agriculture in India: Past
Trends and Future Prospects Paul Sharma, Vijay and Jain,Dinesh (2011), IIMA, available at:
http://iimahd.ernet.in/assets/snippets/workingpaperpdf/21442132562011-07-02.pdf
11
CSO and Economic survey 2009-10
12
Social disruptions such as these, calls for a balance that must be adjusted quickly, thus creating a huge
dependence on subsidies for the un-competitive sectors that eat up the Government coffers. This is why we
these sectors need a nudge.
5

6. In an attempt to protect their own market positioning, cut-throat competition may also
lead to protectionism by the individual businesses. This leads to redundancy and duplica-
tion of effort, as the best practices or knowhow is not shared, and this disrupts the very
foundations of economic efficiency it intended to attain. This cut-throat competition in turn
may entice some businesses to adopt unfair practices13 to cut deals. Also in an attempt to
squeeze out margins in the value chain, the smaller players in the vertical value chain, may
be treated unfairly. Come to think of it, last year, the small sector farmers and retailers have
knocked down the entry of the big retailing giants such as Walmart. The resistance to the
FDI bill in the parliament, brings to the the light some of these concerns and the prospective
threats it poses requires that we take a deep look into them.
There are other compelling facets to the cut-throat competition. When the focus is in
surviving today, the Businesses may loose focus and this hurts long term investments into
Innovation. While Innovation is the primary guiding factor to capture larger market share,
if the ”squeezing out” motive of the firms dominates, coupled with threat of it’s existence -
this may hurt the Macroeconomic foundations and systematically push the economy towards
a hard landing. Or, consider the scenario where to beat cut-throat competition firms start
producing low quality cheap goods. If the quality of these products can not be discerned
by the consumer, this makes the consumer worse off. This is especially true of consumer
electronics, and FMCG sector - as the quality is discovered over time.
Thus, in what follows, I will support these views as thought experiments for achieving
three-fold efficiency - Economic, Allocative and Dynamic efficiency,14 and using three sec-
tors - Aviation, Manufacturing and Real estate exemplify these concerns I have raised above.
Before beginning the discursion, I will pose three hypothesis on what form of competi-
tion can and should be worked out. One, Workable competition works out only for an entire
competitive ecosystem. Two, the cluster of an uncompetitive and speculative industry when
interacting with a fairly competitive industry, raises dynamic bottlenecks which can only be
worked out by allowing for a robust ways of learning information15 . Three, when the focus is
on surviving today, sometimes the firms loose focus on the long terms Innovation that should
drive the sector, as this is undesirable both from efficiency view-point and consumer interest.
13
such as predatory pricing, anti-dumping, price fixing, agreements and abusing its dominant position
14
Judgement in Civil Appeal No. 7999 of 2010 pronounced on 9th September 2010
15
something we will call ”price discoverability” - essentially feeling a uncompetitive pulse before it mani-
fests itself. This is important since it gives the businesses more time to adapt to changing conditions
6

7. The Aviation sector in India raises a fundamental question - If price reduction and com-
petition good for Consumer, should that be the only guiding force for dynamic markets and
can we assume that the markets take care of itself by adjusting its own cost structures,
driving innovation and bringing technologically intensive and sophisticated processes to ail
what continues to handicap the sector. A deeper look into the problems of the sector, is not
the goal of this discussion, rather than re-thinking the market dynamics and that there is
no One-size-fits-all concept, when it comes to competition. Though the aviation sectors has
undergone some very fundamental reforms and consolidation - there is a greater need for the
overall good and re-thinking frugal innovation.
On the other end of spectrum is a question - whether competition can actually bring the
prices down and whether it is good for the end-consumer. Consider Real estate sector - where
the players continue to get bigger and charge what is called ”vanity pricing” , or prestige
affect. The real estate thrives on intermediaries and in many cases, the property(which is
the ”good”) changes many hands till it reached the end-consumer. Coupled with speculative
pricing, and other capital inputs, such raw materials (cement, steel, land) and labor - this
calls for a deeper look into what form of competition can be worked - and needs a fresh out-
look on the many constraints it build on, for a workable competition. This also exemplifies
the social disruptions I mentioned about earlier.
The Manufacturing sector poses another question - Does growth necessarily imply inno-
vation, and by achieving economic efficiency, does it achieve dynamic efficiency. Exports of
manufactured goods in India accounted for 75% in comparison to exports of manufactured
goods all over the world, with the Indian sector valued at $7.6 billion and growing at a CAGR
of 47.2% from 2007 till 2012. Yet, it has not had key innovations compared to the other
nation. The productivity of the manufacturing industry16 in India is approximately one-fifth
of the productivity in the manufacturing industry of US and about half when compared to
South Korea and Taiwan. This demonstrates that dynamic efficiency cannot be worked out
in the absence of other factors that produce lasting change and that fundamental reforms
need to go hand-in-hand with Innovation.
In my opinion, these questions, give a balanced view on the shades of competition and
in what ways can it achieve economic efficiency, and socio-economic welfare.
16
EconomyWatch(2010), ”Manufacturing Industry in India”
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8. Conclusion - Competition begets Competition
Competition in an economy, though desirable is a conflicting goal - which is why we should
apply it with reason. In the introduction, I mentioned how important it is to develop the
rule of reason. To conclude, I envision that the Research Institutions & Think tanks, Reg-
ulatory bodies such as CCI and Policy vanguards will come together to implement research
backed recommendations that would allow this lubricant to function well, allowing for an all
inclusive growth.
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