It is no news to anyone that India fares poorly in giving economic freedom to its citizens and business firms. Two key indexes in this regard establish the poor standing of India.
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In the Index of Economic Freedom brought out by The Heritage Foundation, Indian economy ranked 129th among 186 countries. In the Index of Global Economic Freedom by Fraser Institute, India ranks 79th among 162 countries with 108th rank in business regulation.
The Indian state is not only involved in running businesses that it has no business running but also intervenes in markets quite frequently. Though the intentions are honest and good, more often than not, the interventions succeed in making matters worse.
2019-20 economic survey lists four such interventions by the government of India which has done more harm than good and hurt the ability of the markets to support wealth creation, and has led to outcomes opposite to those intended.
First is frequent and unpredictable imposition of blanket stock limits on commodities under Essential Commodities Act (ECA). The survey notes that such steps neither bring down prices nor reduce price volatility. Rather, they enable opportunities for rent-seeking and harassment.
The survey takes three examples for consideration — a) imposition of stock limits on dal in 2006-Q3; b) sugar in 2009-Q1 and; c) onions in September 2019. In each of these cases, the intervention spiked up the volatility of the wholesale and retail prices whereas the objective was to ease pressure on prices.
The act is anachronistic as it was passed in 1955 in an India worried about famines and shortages; it is irrelevant in today’s India and must be jettisoned, the survey argues.
Due to ECA, four distortions take place in the agriculture market —
a) It weakens development of agricultural value chain;
b) reduces producer’s profit;
c) Inhibits development of vibrant commodity derivative markets;
d) reduces incentive to invest in storage.
All these increase price volatility in the market thereby reducing consumer welfare.
Second is the regulation of prices of drugs through the Drug Price Control Order (DPCO) 2013. The survey notes that this led to the increase in the price of a regulated pharmaceutical drug compared to that of a similar drug the price of which was not regulated.
While the DPCO aimed at making drugs affordable, it ended up achieving the opposite. “The prices increased for more expensive formulations than for cheaper ones and those sold in hospitals rather than retail shops,” shows the survey’s analysis. The very objective of the DPCO stood destroyed.
The survey’s analysis show that the prices of drugs that came under DPCO, 2013 increased on average by Rs 71 per miligram (mg) of the active ingredient, but, for drugs that were unaffected by DPCO, 2013, the prices increased by only Rs 13 per mg of the active ingredient.
For drugs sold at hospital and which came under DPCO regulation, price increased by Rs 99 per mg but for drugs not under DPCO, price increase was only Rs 25 per mg. As far as drugs sold at retail outlets are concerned, for those under DPCO, prices increased by only Rs 0.23 per mg while for those not under DPCO, prices decreased (yes, decreased!) by Rs 1.49 per mg.
Basically the act helped achieve the opposite. As the survey concludes, DPCO “increased prices by about 21 percent for the cheaper formulations (i.e, those that were in the 25th percentile of the price distribution). However, in the case of costly formulations (i.e., those that were in the 99th percentile), the increase was about 2.4 times.”
Third bad intervention is government policies in the foodgrain markets. The survey says that this has led to the “emergence of Government as the largest procurer and hoarder of foodgrains – adversely affecting competition in these markets.”
The Food Corporation of India (FCI) has overflowing buffer supply — more than it needs, and it has to pay up for this humongous food subsidy burden and what does it achieve? It only helped create divergence between demand and supply of cereals.
Moreover, this is the reason why crop diversification remains a dud because farmers keep producing crops that the FCI pays good monies for rather than growing what the market needs.
Currently, we are at a stage where the consumption of cereals (in both rural and urban areas) has been constantly declining since the last two-and-a-half decade due to rise in incomes, the production of wheat and rice (constitute more than 80 per cent of cereals) is constantly increasing and the biggest incentive for this has been continuous increase in their minimum support price).
The survey recommends that everyone will be better off if the government gives direct investment subsidies and cash transfers to farmers which do not interfere with their crop pattern decisions.
Fourth bad intervention has been debt waivers. The survey analysis shows that “full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver when compared to the partial beneficiaries”.
“The share of formal credit decreases for full beneficiaries when compared to partial beneficiaries, thereby defeating the very purpose of the debt waiver provided to farmers,” the survey notes.
As action points for policy-makers, the survey has listed various acts which have the potential to create distortions in the markets and thus need to be amended and repealed. These are Factories Act, 1948, ECA, 1955, FCI Act of 1965, Land Acquisition Act of 2013, etc.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.