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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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.