The Telegraph
Since 1st March, 1999
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- Necessary exceptions to the rule of least government meddling

Having lived for more than four decades under government controls, people see markets as the answer for all supply and price determination. There is a sense that efficiency requires private owners taking control of all public enterprises through privatization. People argue for ‘market’ forces of supply and demand determining all prices. It is argued that any shortages of products and services will disappear after a while as producers enter and increase capacities. All government interference is regarded as bad and ‘markets’ perceived as always right.

The last 15 years have shown many successes with the government’s non-interference. Availability of telephones and telephone tariffs that are among the cheapest in the world are the common examples. Personal computers have become so cheap that there is an explosion in computer and internet usage. Electronic entertainment products have become cheap and pack many more features. So also ‘white goods’ like refrigerators, air conditioners and washing machines. Air travel has become safer, more comfortable and inexpensive. Train travel is moving in the same direction because of competition from cheap airfares. So is passenger bus travel, with a variety of bus services offering varying degrees of comfort at differential prices. The variety and prices of consumer products is unprecedented in our society. It offers a degree of choice to consumers that is the essence of free market operations.

It is not surprising, therefore, that people wonder whether the old days of shortages and poor quality will return if in some instances the government determines supplies of selected goods and services, channels them for different uses and fixes their prices. Market forces and competition have worked to the benefit of the consumer; government controls might put the clock back.

To any rule there have to be exceptions for special cases. With markets, exceptions have to do with the definition of what is the nature of the market that can be trusted to be fair to consumers. Is it open to new entrants, is there competition or collusion between different providers, can a large buyer or seller use his power to control others, is there enough information available about supplies and demands, is there access through adequate transportation capacity to ensure delivery of the product or service anywhere and to all consumers, are prices really market determined or are they manipulated' India, unlike developed countries, has millions of economically very distressed sections of society. For them, some products and services are essential if they are to rise out of their distressed condition and are able to live in some comfort. Such products or services would include education, health services, essential medicines, essential items of food, drinking water, energy for lighting and heating. Such exceptions must be very small and carefully selected. When there is a regulator in place like the Reserve Bank of India, the government must not interfere, as it tried to do by asking banks not to raise interest rates last week.

Close monitoring and regulation to ensure that the markets are really working to offer wide choice, with enough supplies available and no windfall profits to the providers, are essential. In a recent report in The McKinsey Quarterly titled “Regulation that is good for competition”, there is a strong caveat on the working of markets. To quote from the abstract of the article:

“Market economies need regulation to facilitate fair competition and to protect consumers, the environment, and vulnerable workers from unfair practices. Too often, however, regulation has the opposite effect: hindering competition and protecting some groups at the expense of others, which is what happens when, for example, minimum-wage regulations limit the creation of jobs for low-skilled workers. There are damaging effects of three types of overzealous regulation and there have to be guidelines for getting it right.

“Poor regulation is the main factor limiting productivity and growth in economies all over the world, particularly in developing countries. Regulators should protect people rather than jobs and refrain from trying to pick winning companies or technologies.”

In my last column I had argued that gas found in India is a natural resource and should be priced with two factors in mind: the welfare of people and adequate incentives so that further exploration is encouraged. I have had many readers objecting that this would be an interference in the ‘market’. I cannot agree. It is not an objectionable interference to prevent a few domestic gas producers making astronomical returns on investment, while power generation does not grow because the end prices are too high owing to high gas prices. So long as electricity prices are kept below cost and gas prices abroad are affected by producer cartels and international terror, we need gas prices to have a relationship with affordable electricity prices. Only an independent regulator, not a secretive government department, must determine prices of both gas and electricity.

Similarly with drugs’ price control. It is the government’s duty to protect people’s health. Affordable medicines are the key. At the same time, manufacturers must have adequate incentives to develop new and better drugs. For this they need returns that are high enough to pay for the risks involved in developing new drugs, because many new attempts might fail. There is a cost to such failures. Existing drugs have to be priced higher to enable this to happen. But the limited essential drugs list of the World Health Organisation must be priced affordably for the poor. This cannot be done by market forces.

In the past, government banned the export of onions because their prices had risen to unaffordable levels for many consumers. Over time, supplies might improve as more farmers plant more and also improve productivity. But that will take time. Meanwhile, the government must interfere in onion markets. Onion producers should not be selling at high prices abroad when the Indian consumer is short of onions. Onions are the only food flavouring for the poor. It is one luxury that they should not be denied.

On the other hand, in the case of interest rates, it is the RBI that regulates banks and interest rates. They must do the job without interference by the government. Unfortunately, on these matters, unlike in the United Kingdom or Australia or the United States of America, our central bank is subservient to the finance ministry. This must change. Similarly, we must have an independent energy regulator who determines tariffs for all energy products. Alternatively, the new gas regulator must determine gas tariffs, at least for domestic gas, and must relate them to electricity prices. On the same argument, there must be an independent drugs regulator to determine which drugs need price control to protect the poor. This argument applies to a select few products and services. The government must transparently determine what these are.

It is right to want the least government interference in markets. There have to be exceptions. It is the way in which the exceptions are determined, who determines them and the nature of the interference that need independent and transparent regulation.

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