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Wednesday / March 29.

The State Aid and Free Trade Game

India's Step Towards A Complete Competition Law System

By Rob Gehring

The Indian Competition Act (2002) is enacted to meet the requirements of economic growth and international economic developments relating to competition laws. It provides for the establishment of a commission to prevent practices from having an adverse effect on competition. It also promotes and  sustains competition in the business environment. There are three major components of this act: i) anti-competitive agreements; ii) abuse of dominance; iii) merger control.

Furthermore, India has recently radically liberalised its rules for foreign direct investment in the economy.

It includes permitting up to 100 per cent foreign ownership of domestic airlines; a move that sent shares in domestic airlines soaring.

Now it’s time to do one more step: investigating whether India wants State Aid laws.

Why State Aid Laws?

In a free market, companies should invest wherever the market opportunities and returns are greatest. The government should not make decisions for them. Investment decisions are often distorted by a wide range of government programs. For example, the American research centre ‘Good Jobs First’ which tracks the aid and subsidies granted to companies by public institutions, showed that just 965 companies received 75% of all aid in the US.

India has much to learn from the European Union's State Aid Regime.

India has much to learn from the European Union’s State Aid Regime. | Photo Courtesy: Google Images

The most important reasons for imposing EU control over state aid is (i) to stop wasteful spending; and (ii) to prevent countries/states from deliberately and/or unintentionally using state aid to benefit their own national companies at the expense, among others, of ‘foreign’ rivals. Hence, state aid and free trade/investment, go hand in hand.

The European Union, through its State Aid regime, is the only major jurisdiction in the world that has developed reasonably effective rules for discouraging investment-distorting incentives from the government.

As a consequence, in Europe, we control government intervention through specific State Aid laws. The European Union, through its State Aid regime, is the only major jurisdiction in the world that has developed reasonably effective rules for discouraging investment-distorting incentives from the government. As Joaquin Almunia stated: “Anti-competitive behaviour – by both companies and governments – is in nobody’s interest because it ultimately undermines trust in international trade and investment rules. And trust is the most precious commodity in today’s global economy.

Legal Basis (EU)

State aid is governed by the Treaty of the Functioning of the European Union (TFEU). Article 107 TFEU determines that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between the Member States, be incompatible with the internal market.

Any aid granted through State resources — in any form whatsoever — which, in terms of its effects, distorts or threatens to distort competition, is incompatible with the common market as it affects trade between the Member States.

For state aid to exist, the following must be satisfied: (i) aid is granted by the state or through state resources; (ii) to a certain undertaking; (iii) thereby creating a selective advantage; and (iv) the transfer of resources distorts or has the potential to distort competition and trade between EU countries.

Illustration

In 2012, India’s government approved a turnaround plan for Air India. This aimed to restructure debt and improve the state-owned carrier’s operational efficiency. It included a government injection of 300 billion rupees to be drip-fed to the airline over eight years.

Government aid granted to Air India can have dire consequences.

Government aid granted to Air India can have dire consequences. | Photo courtesy: Google Images

Although Indian Air is not Estonian Air, State Aid violations can have far-reaching consequences: “Estonian Air Ceases Operations After EU Orders State Aid Return”.

Suppose India created a separate Agency that could order states to recover incompatible aid from companies. What could have happened with the aid Air India received? Well, if we look at the recent case against Estonian Air, the Agency could conclude that the aid measures gave Air India an undue advantage over its competitors in breach of the State Aid rules. And what about Indian Air? Although Indian Air is not Estonian Air, State Aid violations can have far-reaching consequences: “Estonian Air Ceases Operations After EU Orders State Aid Return”.

Discussion

Do I propose new laws that would harm India and or Indian companies? No, what I would like is to start a discussion whether India needs to embrace policies that – in principle – prohibit the government picking winners and losers thereby supporting market outcomes irrespective of what the outcome is.

Secondly, I think governments should discuss, especially with regards to global industries, whether State Aid laws could help stop a race to the bottom. Concern about the effect of State Aid to non-EU airlines already led to Regulation 868/2004.  This allows the European Commission to take action where a subsidised foreign carrier is seriously threatening the airlines of the European Community. A downwards spiral might follow.

Although I think the India needs less instead of more laws, effective State Aid laws might be an exception since they promote free and fair trade.


Rob Gehring is a Lawyer and economist specialized in European law, competition/antitrust law and free market economics.

Featured Image Credits: Dmitrij Paskevic via Unsplash

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