WORLD TRADE
ORGANIZATIONWT/WGTCP/W/110
16 November 1998
(98-4554)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM INDIA
The following communication, dated 22 September 1998, has been received from the
Permanent Mission of India with the request that it be circulated to Members.
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The Impact of State Monopolies, Exclusive Rights and Regulatory Policies on
Competition and International Trade
(This paper is based on the intervention made by India on the impact on trade and
competition of State monopolies and of institutions that have been granted exclusive rights, in the Julymeeting of the Working Group.)
1. State monopolies and exclusive rights have played an important role in key sectors,
particularly in developing economies.  Governments have often granted special or exclusive privileges
to designated enterprises so as to provide universal supply of a service to all citizens on specific terms
and at affordable prices.  In a country like India, essential services like the railways, the postal service,
supply of electricity, national highways, etc., have  been for long operated by State monopolies.  This
has ensured that development in these capital-intensive areas is uniform throughout the national
territory, a given quality level is maintained and the entire nation serviced irrespective of economics
of operation.  It is therefore evident that State monopolies do have an important role, particularly in
developing economies where market forces are still in their infancy.  This is particularly true where
the services are still being inducted into social life and a conscious push is required to increase theirusage for the welfare of the people.  The benefits of State monopolies, especially in the core sectors
and strategic sectors, would therefore appear to outweigh some of the disadvantages, which might
accompany State intervention.
2. However, notwithstanding the important role that State monopolies have played in developing
economies, it is a fact that there is a direction towards increasing deregulation and demonopolization.
In fact, even in India in sectors such as power generation and telecommunications, which had
traditionally been reserved for the State sector, th ere is an increasing move towards privatization.
This obviously would be true for many other devel oping countries also.  Moreover, with the growing
complexity of the industrial structure and the need for achieving economies of scale for ensuringhigher productivity and perhaps a competitive advantage in the international market, there has also
been a simultaneous thrust on deregulating State monopolistic trade practices.  In India, the trade
practices of all undertakings either owned or controlled by the Government, except certain strategic
sectors related to Defence etc., are subject to the provisions of the Monopolies and Restrictive Trade
Practices Act (MRTP Act).  Thus, in principle, very few commercial sectors of the Indian economy
have been excluded from the application of anti-trust disciplines.  By regulating the trade practices of
State monopolies, there is a specific endeavour by th e Government to ensure that the right balance isWT/WGTCP/W/110
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struck between what are the visibly distinctive a nd advantageous features of State monopolies and the
perceived negative aspects of such enterprises.  Social and political objectives of regulatory policies
could at times appear to contradict the objectives of trade policy, especially if the regulatory policies
were the result of deeply held national commitments.  A case in point could be an equitable
development of all regions of the nation, and the need for infrastructure and servicing expenditure onsuch commitments.  So long as regulatory policies in such cases are transparent and predictable and
due process and regulatory neutrality is ensured, regulations may not only be necessary but advisable.
3. The argument generally adduced for increasing the pace of demonopolization is often linked
to the presumed inefficiency of State monopolies on the grounds that they do not have any incentive
or market compulsion, primarily because of lack of competition, to produce at the most efficient level.
It is stated that the goods or services supplied by State monopolies are consequently more expensive,which in turn adversely affects the competitiveness of the economy as a whole.  While this simplistic
assumption of the working of State monopolies in a market economy may be correct to a certain
extent, it is our view that these two facets, i.e., efficiency and equity, are not necessarily mutually
exclusive social goals.  One manner of looking at this is that the efficiency facet can be related to the
public interest and the equity facet to the consumer interest.  This would suggest that there is serviceof the public interest in the efficient use of a resource or in obtaining economic or technical
efficiencies, while there is service of the consumer interest in the equitable supply of goods and
services.
4. It needs to be recognized that developing countries do not usually have the same well-
functioning market economy dynamics as that which exists in developed countries.  The less
developed an economy, the more the likelihood of market failures.  Hence, for such countries that are
susceptible to instances of market failures, it would not be prudent to rely only on the dynamics of
competition, especially if the sectors involved are critical.  Hence, while the objectives of introducing
competition and deregulation of State monopolies have some merit, it is important to provide a certaindegree of flexibility to developing economies so that they can pursue this path at their own pace.  In
fact, the World Investment Report of 1996, while observing that globalization will have pervasive
consequences for the development prospects of all countries, in particular those of developing
countries and economies in transition, specifically suggests that the development objectives should be
safeguarded by allowing countries in need of a transition period the time to adjust to such changes
through exclusions, exemptions and other temporary measures.
5. Views have been experienced about the need to ensure market access in sectors subject to
widespread government regulations and/or where enterprises have been granted special or exclusive
rights.  While issues of market access are no doubt important, we do not feel that while examining the
trade effect of State monopolies and of those enterprises which have been granted exclusive rights,
these are the only issues to be addressed.  As stated earlier, State monopolies have played animportant role in economies of developing countries.  Apart from being major employment providers,
they have also fulfilled an extremely important socio-political role.  Thus, while there is no doubt that
competitive practices would need to be introduced in all sectors and that competition would need to
be promoted through privatization and demonopolization, this would necessarily have to be a gradual
process.  Apart from the fact that the State has to fulfill its obligations by ensuring social equity, italso needs to be recognized that deregulation of an y traditionally reserved sector is not without its
political connotations, particularly in view of  the large-scale employment provided by State
enterprises.  Hence, decisions regarding demonopolization have to be taken in the context of these
realities.  Another factor is that only such competition measures may be addressed multilaterally
which have a significant impact on trade and a similarly high impact on possible discrimination
between domestic and foreign suppliers.  Clearly, much more analysis may be required to identify
issues of concern in these areas.WT/WGTCP/W/110
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6. Before concluding, we would like to state that to a certain extent the existing WTO
provisions, particularly those relating to the activities of state trading enterprises, already provide a
certain mechanism for monitoring the activities of  enterprises which have been granted exclusive
rights by governments.  While there would no doubt be areas where the current framework of WTO
rules may not provide adequate coverage, we feel that it is still too early to draw any conclusions onthe need, if any, to complement the current WTO disciplines.
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