economic-survey-vol-1-chapter-4-undermining-markets-when-government-intervention-hurts

Government intervention, sometimes though well-intended, often ends up undermining the ability of the markets to support wealth creation and leads to outcomes opposite to those intended. This chapter analyses four examples of anachronistic government interventions, though many more abound.

Post a careful analysis, it calls for rooting out such interventions that outweigh the benefits that would have been occurred in the paucity of such interventions.

Study of Four Sectors and the Acts concerned therewith

Acts/Sectors

Provisions and Objective

Adverse Impact

Essential Commodities Act, 1955 (ECA)

Provisions

  • Categorized essential commodities such as Vegetables, Pulses, Edible Oils, Sugar, etc. 
  • States are empowered to control the production, supply and distribution of such goods and also trade and commerce.
 

Objective 

  • Restricting hoarding to ensure the affordability of essential commodities for the poor.

Market Distortion

  • Reduces free trade and flow of commodities from surplus to deficit markets.
  • Commodity derivative markets also suffer due to the non-delivery of such commodities owing to the stock ceiling.
  • Harassment of traders due to raids in turn disincentive the entry of the Private Sector.
 

Weakened Agri Value Chain

  • Blurs the distinction between genuine Inventory requirements versus Illegal hoarding.
 

Price Volatility

  • The Act disincentives development of storage infrastructure that conclusively, aggravate the price volatility. E.g. Onion prices which shot up recently.
 

Administrative Burden

  • A large number of personnel are involved in the enforcement of the act.

Drug Price Control Order (DPCO) under ECA

Provisions

  • NPPA (National Pharmaceutical Pricing Authority) and DPCO are the mechanisms available to regulate the prices of pharmaceutical drugs.
  • DPCOs are issued under section 3 of the ECA to ensure the availability and affordability of medicines listed under NLEM (National List of Essential Medicines prepared by Health Ministry).
 

Objective

  • Seeks to regulate the prices of pharmaceutical drugs.

Price Volatility

  • The outcome is opposite to what DPCO aims to do - making drugs affordable
  • The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops.
  • Study of two drugs related to Blood sugar
  •  Glycomet (Metformin) which came under DPCO while Glimiprex-MF (Glimepiride+Metformin) didn’t.
  • Study shows that the price of Glycomet actually increased more than that for Glimiprex-MF after DPCO, 2013, keeping the quantity constant (In line with the inelasticity of Pharma Drugs)
 

Disincentivizing for Markets

  • New developments in the medical sector will be affected and compromise Social welfare.
  • It is detrimental to wealth creation and impacts economic development. 

The Food Corporation of India (FCI) under the Food Corporations Act, 1964

 

Government Intervention in Grain Markets

Provisions

  • The state controls backward linkages such as input prices such as those of fertilizer, water, and electricity, and also, forward linkages by setting output prices.
  • Undertakes storage and procurement through administrative machinery.
  • The last stage is the distribution of cereals across the country through the PDS.
 

Objective

  • To achieve food security.
  • Ensure remunerative prices to producers. 
  • Safeguarding affordability to the consumers.

Crowding out of Private Sector

  • Due to Government acting as a monopsonist (Single Buyer)
  • Most of the grains are hoarded by the government, little left for the market.
 

Price Distortion

  • MSP has become the Maximum price, contrary to the objective of a minimum floor price.
 

Sustainability

  • Skewed nature of cropping due to higher MSP on cereals, No diversification
  • Production has been driven by MSP
  • Affects environmental sustainability due to faulty cropping patterns.
  • It also restricts investment in the agricultural sector impacts overall inclusive growth.
 

Fiscal Burden

  • Elevated cost of Foodgrain Economy
  • Due to obligation under NFSA and PDS, cost of food subsidy has become more.

Debt Waivers



 

Government intervention in Credit Markets

Objective

To let borrowers get rid from debt overhang.

 

Debt Overhang:  (Refers to a situation where all current income gets used up in repaying the accumulated debt, invest either in physical or human capital. 

No relevant Gains

  • Neither agricultural investment nor productivity increased
 

Fiscal Cost 

  • A stimulus worth close to 2 percent of the GDP.
  • Also, it has a contagious impact on other segments of credit markets such as bank loans.
 

Bad precedence

  • It may lead to moral hazard and destroy the credit culture
 

Inequality

  • It treats two comparable defaulters in an unequal manner based on the cut-off date.
  • A waiver helps only when the beneficiaries are genuinely distressed or a conditionality is effectuated.

What are the proposed solutions?

  • Essential Commodity Act 

  1. It needs to be repealed and replaced by market-friendly interventions like Price stabilization funds.
  2. Direct Benefit Transfers (DBT) support
  3. Incentives to innovations
  4. Increasing market integration 
  5. Smooth flow of goods and services.
  • Food Grain Policy

  1. Procurement operations of wheat, paddy, and rice need to be given to states. 
  2. FCI should primarily focus on creating competition in every segment of the foodgrain supply chain, from procurement to stocking to movement and finally distribution in TPDS. 
  3. Cash transfers/food coupons/ smart cards can be introduced like that of
  4. Philippines: Pantawid Pamilyang Pilipino Program
  5. Brazil: Bolsa Familia
  6. Mexico: Oportunidades
  7. At the macro level, agricultural marketing, trade (both domestic and foreign) and distribution policies need to be aligned with that of farmer’s interest.
  • Drug Pricing

  1. As the Government is a huge buyer of drugs it can intervene more effectively to provide affordable drugs by combining all its purchases and thereby exercise its bargaining power.
  2. The Ministry of Health and Family Welfare must evolve non-distortionary mechanisms that utilize the Government’s bargaining power in a transparent manner.

Debt waiver

  1. There is a case for a limited relief only when distress can be identified credibly
  2. It is like an emergency medicine to be given in rare cases after a thorough diagnosis and identification of illness and not a staple diet. 

Legislative Action to repeal interventions like

  1. Sick Textile Undertakings (Nationalisation) Act, 1974
  2. Factories Act, 1948
  3. Recovery of Debts due to Banks and Financial Institutions Act, 1993
  4. Food Corporation of India (FCI), 1965
  5. Essential Commodities Act (ECA), 1955 prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act, 1980

Conclusion

  • All in all, there is a case for Indirect Government intervention(In the role of a regulator) if there are serious cases of market failures in the following terms.
  • Providing public goods 
  • Preventing abuse of monopoly power
  • Distributing wealth equitably
  • Ensuring ethical practices
  • But it is to be made sure that any intervention doesn’t undermine the ability of markets to support wealth creation, shackles economic freedom.
  • However, in the paucity of such failures, eliminating such instances of needless Government intervention will enable competitive markets and thereby spur investments and economic growth.

Also readGrowth Rebounding To 6% - Economic Survey

Summary Of Economic Survey 2019-20 Volume 1