The author is professor of economics at the Indian Statistical Institute, Calcutta
Transporters recently called off their ten-day-old nationwide truck strike after the government accepted most of their demands. The strike imposed a deadweight loss of Rs 200 crore a day to the transportation industry and a lot of hardship on the common man. The total daily loss to the country from the strike is estimated to be Rs 1,500 crore. Now that the strike is over and business is expected to return to normal, one may ask: was the strike justified, and more important, was the government justified in accepting the demands'
The strikers had a number of grievances. The one that would appeal most to an outsider was their unhappiness about the rising and fluctuating prices of petrol and diesel. Ever since the domestic price of petroleum has been tied to the international price, the former is generally on the rise. On a few occasions it has gone down too. But the trend is certainly an increasing one. Rising petroleum prices is a drag on profits, but worse still, fluctuations increase the uncertainty of doing business. With prices behaving so erratically, how could one make business plans'
The strikers, therefore, seemed to have a point. To strengthen their case further they argued that they were unable to increase the price of their services even though petroleum prices were rising. This is partly because of uncontrolled competition within the sector and partly because of the government’s reluctance to let the price rise. Of course, it is easy to understand why the government is reluctant. After all, transportation is a public service. The government cannot allow the cost of transportation to increase without bounds.
Such an increase would have social and political implications, which the government would like to avoid, especially at a time when general elections are almost round the corner. So the government has decided to retain some control on the price of transportation services though it has decontrolled the price of petroleum. To the transporters it seems unfair. With input costs going up, but output prices not increasing proportionately, they get very little chance to survive.
The hardship of the transportation industry does not end here though. Forget about input price fluctuations and stagnant output prices. More fundamentally, the problem of the transportation sector is one of a high level of input costs. This high level of input cost, in turn, is because of the tax policy of the government. On an average, petrol and diesel prices are taxed at the exorbitant rate of 150 per cent. These items are hardly luxuries; so one cannot reduce consumption significantly even if there is a rise in the price. Consequently, they are easy targets of tax collection. The government, with a view to raising revenue, has in the past kept on increasing the tax. In this respect, petrol and diesel resemble the liquor industry. No one will, however, deny that from an ethical point of view they are rather different.
All this is supposed to add up to the conclusion that the strikers had good reasons to complain. They surely complained and did much more than that. They flexed their muscles and twisted the arms of the government to get what they wanted. Consequently, the government has promised them a quick downward revision of diesel prices. Now they can also get an assurance of minimum freight rates from the states which will guarantee a lower bound on the price of their services. Question is: are these measures justified on economic grounds'
Consider first the problem of a fluctuating input cost and a stagnant output price. This problem is not confined to the transportation sector alone. One may observe this phenomenon in other sectors as well. If you are in the habit of regularly going to the market, you must have noticed that some prices are rather volatile by nature. Take, for instance, the price of fish, say, Bekti fillet. Your experience would tell you that the price per kilogram is different on different days of the week. In fact, the price would typically vary even across different hours within the same day. This price fluctuation is something that you will perhaps accept as normal. But when you go to your favourite restaurant over the weekend and order your favourite grilled fish platter you are accustomed to pay a fixed price. In fact you are accustomed to pay the same price every week, week after week.
If you really think about it you would find it puzzling. You might be tempted to ask: how come the price of the grilled fish platter is remaining stable while the price of its main ingredient, namely, raw fish fillet, is fluctuating so much'
Economists would surely ask such a question and most certainly they would differ when it comes to finding an answer. Some would tend to think that prices of primary products are inherently flexible while those of industrial goods are essentially sticky. Others would try to relate the stickiness of prices to lack of competition. A third group would put forward an explanation in terms of “menu costs” arguing that it is costly for some firms to change their menu of prices and hence these firms tend to change their prices only occasionally. The reason behind the coexistence of flexible and sticky prices need not bother us here. It is sufficient to note that apart from the transportation industry there are other industries, which face the problem of fluctuating input prices. If these industries can face the risk of input price fluctuations, why can’t the transportation sector'
Second, even if the transporters were given the liberty to freely change the price of their services as frequently as they want, most probably they would not change it every time there is a change in the petroleum price. This is exactly for the same reason as the restaurant-owner does not change the price of the grilled fish platter every day. The government has very little role to play here. More important, though the strikers complained about high input prices and have been successful in lowering them by flexing their muscles, they also want the government to maintain a minimum support price for their services as well. Thus the transporters want a system where their output prices can only go up and is never allowed to decrease, even if there is a reduction in input prices. This is a sign of distortion, arising out of collusion and monopoly power of the transport sector as a whole vis-à-vis the rest of the economy. Evidently, unionism is the source of such monopoly power.
In short, the strikers wanted to bring back a system of government control which will work to their full advantage. Clearly they have been successful in getting what they wanted. In the new system, both input costs and output prices will be partially protected by the government. By conceding these demands, the government has indeed sent a bad signal to the rest of the economy. It has sent the signal that under the present circumstances arm-twisting can work, lobbying has excellent prospects and backtracking from the commitments of economic reforms is normal.
A much better policy would have been to reduce the tax on petrol and diesel. It is known that the tax revenue on these two items are used to subsidize other petroleum products like kerosene and cooking gas. But why do we have to restrict ourselves to taxing one set of petroleum products in order to subsidize another set of petroleum products' If we decide to subsidize one set of petroleum products, we can raise the cost of subsidy from anywhere in the economy. In fact, it makes good economic sense not to raise the money by taxing petrol and diesel, for this has a very high inflationary potential.