Dealing with Competition Issues in the Indian Informal Sector

[Manohar Samal is a Master of Laws student at the National Institute of Securities Markets, Mumbai]

Competition law has played a vital role in enhancing healthy competition in Indian markets and has also boosted innovation and economic development. The Competition Act, 2002 is the principal legislation which prevents activities that have adverse effects on competition in the Indian market. Even though various amendments have taken place under the Competition Act, the important question which still remains is whether the Competition Act, 2002 applies to the informal sector in a sufficient manner.

Various market segments in India are a part of the informal sector. This is evident from the fact that the informal sector markets in India contribute to half of India’s Gross Domestic Product (GDP). Despite this, most laws and regulations blatantly ignore the impact of these markets on the overall economy. The Competition Act is no exception to this and the non-application of competition law over such informal and unorganised markets is capable of encouraging unhealthy competition and in catering to unfair market practices. It is important to point out that businesses in the informal sector often escape the standards laid down by the Indian competition law leading to drastic effects on competitiveness and fairness in the market, especially when various formal businesses simultaneously exist in the same sector. This post, therefore, aims to showcase competition issues and also attempts to provide few suggestions for solving the problems.

Understanding Markets in the Indian Informal Sector in the Context of Competition Law

The informal sector comprises markets where activities conducted are never officially recorded and no form of tax is imposed on them. Moreover, informal sector markets are almost never registered, do not enjoy the policy and scheme benefits provided by the Government and do not follow any form of laws or regulations framed by the Government. This can prove to be extremely challenging, especially in the realm of competition law mainly because of the fact that informal sector markets function in the same relevant product and geographical markets where formal markets exist and, despite such parallel existence, enjoy the benefits of non-regulation under competition law.

Contrary to popular belief, informal sector markets are completely capable of indulging in anti- competitive conduct, thereby causing unhealthy and unfair competition for formal markets operating within the formalised system. These can include the existence of untraceable anti- competitive arrangements (covered under the definition of “agreements” in section 2(b) of the Competition Act, 2002) which restrict production, distribution and supply of commodities or services and price fixing leading to the violation of section 3 of the Competition Act, 2002. Similarly, informal market players can even indulge in abuse of dominance, amounting a contravention of section 4 of the Competition Act, 2002.

The pertinent competition enforcement problem existing for abuse of dominance by informal markets is the lack of possibility of calculating market shares in the relevant product or geographical market. This is capable of creating several issues in calculating market dominance of informal markets for the Competition Commission of India and the Director General engaged by the Commission. Some of the prominent Indian informal market sectors where such statutory violations and competition enforcement challenges can arise include the vegetables and fruits market, indigenous handicrafts market, construction materials market, traditional artisans market, markets with hawkers, hand cart (haath gaadi wala) and luggage picker (coolie) markets and other informal vendor markets.

At this stage it is important to clarify that the substantive part of the Competition Act, 2002 is certainly capable of covering informal markets and this is evident from the definitions of “enterprise” and “person” under sections 2(h) and 2(l) of the Act, but it is competition enforcement which has not been achieved in an effective manner. Data suggests that the negative impact of the non-application of competition enforcement in informal markets being stated above is not witnessed or understood immediately since it creeps into the market system over a span of time. This being said, it is important to understand that constant innovation and an incessant attempt to satisfy consumers through better quality of products at better prices are few of the factors which lead to a healthy competition. But, when large portions or sectors of the market are being dominated by informal market players powered by lawlessness and deviance from law and regulation, the objective of achieving healthy competition through constant innovation, fair prices, good quality products is defeated, since most informal market players neither have the resources nor the compulsion to participate in the grand process of achieving a healthy competition that contributes to economic and social welfare. Unfortunately, the problem is much more serious than what is acknowledged in this sphere.

Way Forward and Conclusion

It is pivotal to understand that anti-competitive behaviour in the informal sector cannot be tackled by villainising the market players of the informal sector because of the simple reason that the informal nature of their commercial activity is a creature of lack of relevant commercial knowledge and skill, lack of sufficient capital, funds and size, lack of access to infrastructure, lack of access to financial institutions and banks, cumbersome government regulations and barriers to entry in the market. Therefore, it seems to be apparent that tackling informality requires a multi-faceted approach towards formalising unorganised and informal markets. However, since the issues of competition enforcement have been discussed, an attempt will be made to make few suggestions from the competition law angle.

Initially, considering the fact that commercial knowledge and skill of informal market businesses is low, the Competition Commission of India can undertake competition advocacy activities focused on informal market sectors under section 49 of the Competition Act, 2002. Competition advocacy can prove to be a useful first step towards dealing with competition enforcement issues in the Indian informal markets since the relevant businesses operating in the unorganised and informal sectors can be made aware and consulted about competition issues in their respective markets. Furthermore, under section 49(3), training can be imparted to competition enforcement officers and the office of the Director General, specifically in respect of collecting information, procedures for investigation and competition enforcement in the informal markets.

A bare reading of section 19(1)(b) shows that a reference can be made to the Commission by a statutory authority, State Government or Central Government. The provision has great significance in the context of informal markets since various licensing authorities, registration authorities, direct tax and indirect tax enforcement authorities are often involved with formalisation attempts and section 19(1)(b) can prove to be resourceful in informing the Commission about section 3 or section 4 violations in the informal markets, permitting it to initiate investigation and undertake competition enforcement activities. Unfortunately, this remains to be an underutilised tool and ought to be increasingly used in order to permit the Commission to bridge the information gap about competition law violations under sections 3 and 4 by the informal market businesses. Therefore, it seems to be clear that effective competition enforcement in the Indian informal sector can go a long way in reducing unhealthy competition for formal market enterprises, speed up the process of formalisation and also increase the quality of competition in Indian markets.

– Manohar Samal