Competition has become a buzzword for reformers in India as the answer to problems of shortage, high prices, collusion to exploit the consumer, unfair practices, and so on. But competition cannot be an answer by itself. Competition must always be accompanied by transparent, predictable, consultative, comprehensive and independent regulation. The collapse of global financial markets demonstrates this.

There must be no constraints on expanding supply. There must be no trade barriers or financial limitations of availability or high interest cost to prevent new capacities from being built or alternative products or services from being made. There must be a strong and well-enforced legal system that sets standards, inspects their implementation and punishes violators. An honest and transparent regulatory framework is necessary. There must be a speedy mechanism for customer grievances to be submitted, dealt with and redressed fairly, with provisions in case of dissatisfaction and for appeal to a higher authority. There must be an easy and comprehensive flow of information on products and services, their availability, prices, quality, and so on. Even when all these requirements are satisfied, there are instances where competition is not helpful to the consumer interest, and could, indeed, be harmful.

A good example is that of health services. A sick person is usually at the mercy of whoever is treating him. He does what the doctor asks him to do to get well soon. If the doctor prescribes some tests he gets them done. Medicines that are prescribed are bought, of the brand prescribed. Rare is the patient who will take a substitute even when the ingredients are the same and the manufacturer has a good reputation. If the doctor suggests surgery, most patients will have it done.

This gives immense power to the doctor. Less power, but power nonetheless, is with the others in the health delivery system: nurses, pharmaceutical retailers, hospitals, nursing homes, clinical laboratories, and pharmaceutical manufacturers. There are many instances of doctors who have a tie-up with clinical laboratories, and who take a commission on all tests that a patient has been sent for. Doctors control beds in many public hospitals and their patients get beds without difficulty in those hospitals. The doctor has a bond with his patient which may be lubricated by his relatively high charges. How can one doctor who does not have such control, compete with another who does?

Pharmaceutical manufacturers take advantage of this close and trusting bond between the patient and his doctor. They buy the doctor so that he prescribes only their brand of medication. The doctor is remunerated in many ways apart from straight cash. He might be sponsored by the company to attend an all-expenses-paid conference in India and sometimes abroad. For the really important doctor who has the capacity to generate many prescriptions and to influence other doctors, this might include the family.

These few examples show that there is no competition in the pharmaceutical industry. A drugs regulator who must prevent abuses has almost never taken action. He is not an independent regulator. Nor is the pharmaceutical pricing authority an independent regulator, functioning like a government department, without transparency and consultation with all interests. India is a major global agent in the production and marketing of generic drugs, but very few generic drugs are sold. The consumer has little protection from rapacious manufacturers, doctors and clinics in which he places all his trust.

Health services need firm, fair and transparent regulation at all stages — of doctors and their practices, pharmaceuticals manufacture, distribution, promotion and pricing — to prevent exploitation of the customer’s vulnerability when he is sick.

Many infrastructure services are also not open to competition, especially when finance is restricted, procedural bottlenecks to investment are many, and political interference is great, preventing remunerative tariffs. As natural monopolies, investments are large and no other such facility built nearby can be viable. Electricity, ports, roads, railways, water for drinking as well as agricultural and industrial use, are some areas where competition is possible only at the construction stages. Contracts to build can be bid for in a competitive environment. The number of players might be limited, making it essential that tenders, their processing, bidding documents, are all prepared thoroughly and carefully, allowing no room for subjective criteria.

Their services might not be open to competition. Electricity and water can, in theory, be provided by many suppliers. The one experience in the United Kingdom, where retail competition in electricity was tried, has not been successful. For bulk customers, there could be competition among suppliers, provided transmission lines are open and accessible to all. Ports can compete with each other if their hinterlands are well-developed. Dubai and Singapore are good examples of ports that have competitively taken traffic from intermediate ports. Roads and airports are in similar situations. Railways can introduce competition for customers between trains and for different services, but the UK has had these, with considerable losses and poor service.

In such services, the customer interest of supply quality and reasonable tariffs must be protected by independent regulation that also must, in a services-short country like India, promote investment. Governments must not interfere with independent regulatory decisions. The customer must be encouraged to pay the tariffs determined transparently and in consultation with the regulator. India has been poorly served by governments and many infrastructure regulators. This has kept private investments away.

Telecommunications and airline services are examples of infrastructure services where competition in retail supply has been effective for the customer. Telecommunications consumers have benefited from the competition between different operators. But the competition is not complete because consumers are tied to the number given to them and are reluctant to shift to another operator if they have to change the number. Telecommunications has an independent regulator who is trying to introduce number portability.

Airlines do not have an independent regulator. Airlines depend on the availability of suitable airports with enough capacity, landing slots, terminals, air control, and reasonably priced aviation fuel. Airlines and airports must be independently regulated by the same regulator. An independent regulator might not have permitted so many airlines to come in when the airport capacities were so inadequate. A wise government that was licensing airlines would not have made their largest cost element, fuel, more expensive with high taxes.

Clearly, competition is not the only or the whole answer to optimizing customer satisfaction in many products and services. Competition requires an independent regulator to ensure that the conditions for competition are not violated. In the case of life-giving services or natural monopolies that have barriers to competition, the role of the independent regulator has to be even greater, since he has to determine and award licences, tariffs, ensure fair market practices, and so on.