Column: Price distortions and regulatory slack

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SummaryThe electricity experience suggests that the government should not interfere in market and cost-based pricing decisions.

Much of the discussion on public finance has been on macro issues relating to the size of the deficit, tax-to-GDP ratio and, recently, taxing the very wealthy at higher rates. But there are more specific issues that have needed attention for long. They have, in some cases, become more important, as economic growth has accelerated, and inequalities increased.

One of them that predates liberalisation by many years is the differential taxation of the same products when made in India and when imported as finished products. Within India, the goods and services tax (GST) was to bring about uniform tax rates between states. It was to make the Indian Union into a true common market. But the GST is yet to become law. The same product made in India has very different rates of sales and other indirect taxes between states. However, if the product were to be imported, it is subject to an import duty, which, with liberalisation, has become modest. This is grossly unfair on the Indian producer whose product costs more.

Another unfairness is in the differential rates of import duty on raw materials and finished products. If polyvinyl chloride (PVC) is imported it is subject to one rate of duty. However, the raw materials for PVC are not fully available in India and a part has to be imported. The import duty on raw materials is higher than the import duty on the import of PVC as finished product. The same applies to vehicle tyres. This makes the locally manufactured product more expensive.

The government has, in the last few years, moved aggressively with infrastructure projects funded and executed on public-private partnerships (PPP). This has enabled marginal government funding and substantial private funding for projects. The return on the private funding is through tolls, property rights, advertising entitlements, etc. It requires good forecasting of future revenues through these means. If the bidder in a competitive situation bids aggressively, he might overestimate the prospective revenues and find that the project is unviable since the revenues are inadequate to cover costs. There are an increasing number of instances in which the bidders have dropped the project after it is being awarded to them, and even when they have initiated work because the revenues are likely to be grossly inadequate. A prominent instance was of the Hyderabad Metro, for which Maytas (a Satyam company) made a successful bid and then withdrew. This delayed

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