Innovation can lead India to forefront of competition : CEA Subramanian

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New Delhi : Chief Economic Adviser (CEA) K V Subramanian on March 1, 2019, said that if this century has to belong to India then innovation has to be at the forefront. Therefore, competition policy in the context of innovation becomes really critical, he said  in his keynote address at the 4th edition of national conference on ‘Economics of Competition Law’ organised by Competition Commission of India here.

Subramanian also advocated for deterrence as a tool to make defaulting companies fall in line with set guidelines and follow pro-market behaviour. 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.

Explaining the link between competition and innovation, the CEA said that in a perfectly competitive industry firms will only be able to price their products to the marginal costs. If they are pricing to marginal costs then there isn’t enough profit to be made. In a perfectly competitive market, price has to be equal to the marginal costs. If the industry is expected to be perfectly competitive then no firm in that industry will have enough incentive to invest in innovation because the returns are not adequate. He also said that the other extreme of monopoly also doesn’t lead to innovation.

Subramanian said the sweet spot for more innovation is actually a moderate level of competition. If there is extreme competition, you don’t get innovation. The CEA said that perfect competition doesn’t lead to more innovation. The higher the competitive pressure, the greater seems to be the innovation.

Pressing upon the need for competition policy to account for the specificities of the sector under consideration, Subramanian said there are some sectors where perfect competition does not provide best outcomes. Competition policy, therefore, needs to be assessed sector by sector.  Deep financial markets are critical for funding of new ideas. When new firms challenge incumbents, they innovate to avoid being “creatively destroyed”, he said.

He pointed out that proportion of credit, though not the magnitude, flowing to smaller firms has shrunk over the last decade, which needs to be addressed through enabling regulatory framework. 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.

Ashok Kumar Gupta, Chairperson, CCI, in special address, emphasised the necessity for an enforcing authority to frame its guiding policy in a clear and transparent manner.