Why NSE order has landed Competition panel in soup

The Competition Commission of India (CCI) has written an order on the National Stock Exchange (NSE) and MCX-SX in the currency derivatives market. Even if you do not take interest in financial markets, this is an interesting episode in Indian governance. It illuminates the larger problems of building regulatory agencies, and India’s middle income trap.

In an impressive show of strength with the media, there was a flurry of editorial and other commentary praising CCI for this order - even before the order had been released. The files are now on the CCI website. Here is the main order and here is the dissent by two members of CCI.

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Gautam Chikermane has written an excellent analysis of the order in the Hindustan Times. Unlike much of the other commentary on this order, he has actually read the two PDF files above. Also see this editorial and column by Mobis Philipose, in Mint, on June 6.

The order has breathtaking ramifications. If this works as a precedent, it would impose huge complexities upon an array of industries where some products and services are given out free. This feature is particularly prevalent in the new economy, where systems such as Google search are free and have been free for the longest time, and where a blizzard of new product launches (e.g. Google Plus) are free.

In India, regulatory organisations are still finding their feet. They have to gradually build up credibility and respect. When a regulatory body signs on a breathtakingly large penalty which will have huge implications for the economy, they have to be absolutely sure they are right. Otherwise, the institution loses credibility. I fear that with this order, CCI is now in a soup.

If the appeals process is half decent, the order will be overturned, which will make CCI look bad. If the appeals process is not half decent, CCI will be seen as a source of trouble in the Indian regulatory landscape. In numerous industries, zero pricing will run into trouble. More generally, such muggings will be a new dimension of the political risk faced by firms operating in India.

India’s crisis of governance is about the puzzle of building agencies like the Competition Commission of India, of taking these agencies closer to the competence and honesty seen at Sebi in recent years. How do we master the intricate recipe of public administration, so that such events don’t happen? Until this is done, the structure of incentives encourages a certain kind of entrepreneur, and will damage the outlook for India.