New Delhi, March 1 (IANS): Deterrence is crucial for encouraging pro-market behaviour, while effective competition is important for fostering innovation, Chief Economic Adviser (CEA) K.V. Subramanian on Friday.

Delivering a lecture here on the Economics of Competition Law organised by Competition Commission of India (CII), Subramanian also said that effective competition in product markets and factor markets is important for fostering innovation in the Indian economy, which will help generate jobs, entrepreneurship and growth.

"Innovation is so important in today's economy. If this century has to belong to India then innovation is something that we have to focus on. Competition policy in the context of innovation, therefore, becomes really critical," he said.

Noting that history shows that while higher competition pressure is a catalyst for increased innovation, a perfectly competitive market, or even one with low competition, offers no incentives for promoting innovation, the CEA said, citing the example of the commodities sector.

"Innovation is highest at moderate levels of competition...perfect competition is not the best market design in healthcare, for instance," he said.

"Factor productivity, which for innovation is essentially finance, or risk capital, and research talent, in India could be 50 per cent higher through greater competition across most sectors.

"Greater product market competition can play an important role in innovation," he added.

Subramanian advocated deterrence as a way to make defaulting companies follow pro-market behaviour, citing the example of the Insolvency and Bankruptcy Code (IBC) enacted by Parliament for the resolution of banks' non-performing assets (NPAs) or bad loans.

"Deterrence is crucial for encouraging pro-market behaviour," he said.

"The fear of defaulting companies to be brought under the IBC compelled many of them to voluntarily approach the banks and pay up," he added.