Column: Pricing blues

Written by Meghnad Desai | Updated: Feb 17 2014, 05:48am hrs
Any country where there are celebratory headlines about the inflation rate having plunged to a low value of only 8.79% needs its collective head examined. People are already urging Rajan to cut interest rates and encourage growth. It is not only the politicians but even the private sector leaders who should know better. India used to have a high reputation as a low-inflation country. Never before has it had four years of persistently high inflation with the government doing nothing to correct the inflation trend but secretly approving its redistributive effects for its rural vote gatherings strategy. Perhaps in that if in nothing else, UPA-2 has achieved its policy aims. It wanted to punish the urban areas for having enjoyed the fruits of liberal reforms. The weapon was food price inflation. The NAC designed this policy. Now, hopefully, it will ensure the defeat of Congress in 2014.

The perverse nature of the Indian political economy consists of a deliberate misunderstanding of how prices allocate resources and how any neglect of the economic logic of pricing imposes costs somewhere on someone in an unintended fashion. Politicians believe, or at least pretend to, that any itemgoods or servicesold through the state must have a price which bears no relation to costs. As we see in Delhi, the AAP believes that water or electricity must be priced popularly rather than in any way which would make sense in terms of the environment or the economy. Water is scarce and should be used sparinglynot given away at low prices, especially to the better off.

If Kejriwal goes into a dhaba, he pays whatever he is asked for his paratha and chhole . Why then does he think that goods or services where the Delhi government has any say should be priced below cost For decades, state power companies have been making losses and passing the burden on to taxpayers via deficits. Lately, some economic sense has come into this sector where private companies have been providing power at cost-plus prices. In Delhi, the result has been fewer outages which itself is worth paying for as I can attest being an occasional consumer. Now, Kejriwal wants us to go back to the bad old days of loss-making power supply and frequent outages. If he knew any economics, he would know that the price should cover the availability of the commodity . It would be easy to make power free but unavailable.

Over the years, the progressives have put their faith in the government intervening in pricing decisions. Administered prices litter the landscape. Once the government gets into pricing then politics takes over from economics in pricing. Thus, for years, petrol prices had to be subsidised because politicians of all hues argued that petrol prices affect the poor. It takes very little thought to see that car-owners are not BPL nor does it help to encourage polluters who foul up the air by their emissions. Petrol has now been deregulated, at last. Each price hike leads to some political party launching a bandh. But when price goes down, the same party does not celebrate and argue for work overtime!

Now, a further muddle has been added due to the problem of scams. On the one hand we want the government to be in charge of pricing but since there is also a widespread feeling that governments are corrupt, any pricing decision by the government is also suspect. This is the story behind Kejriwals latest wheeze to ask the Anti Corruption Bureau to investigate the gas-pricing decision. The allegation is of crony capitalism. Of course, any increase in price even if in line with international price trends or even more importantly justified by environmental considerations is ipso facto bad and hence a conspiracy, according to Kejriwal. This time there was the Rangarajan Report which laid out the logic of why the price had to be changed. But economic logic has been trumped by populist pressures.

If Kejriwal does not wish there to be a nexus between government and business, the answer is to remove the government from any pricing decision and leave it to the market which is global in the case of natural gas. Once a government has no allocative powers, it cannot favour one capitalist over another. Let there be competition and effective regulation and the possibility of crony capitalism is eliminated. Once there was a queue for telephones and you had to seek the favour of ministers to get a phone line. Now, there are mobiles and no bribery necessary. The same goes for cars which can now be bought rather than applied for as in the old Ambassador days. Socialist pricing leads to crony capitalism. If there are resources to be allocated which are in the public domain, there should be transparent auction and not allocation by losing files as in the case of coal. Better still, privatise Coal India.

The author is a prominent economist and Labour peer