Cautioning against the ongoing efforts to rein in inflation with price control, credit rating agency Crisil has said controls in the long-term are clearly damaging as they distort resource allocation and create shortages.
Capping the prices of steel and cement artificially, for example, could force manufacturers to put their expansion plans on hold. This could have a long-term adverse impact, as the resulting shortages push prices up further when controls are lifted. It can also potentially decelerate the investment momentum that is driving overall GDP growth in India. In the unreformed petroleum sector, price controls are creating a situation where oil companies? finances are increasingly stretched, while the consumer receives no signal to cut down or rationalise oil consumption.
?The imperative underlying these attempts is to bring immediate relief from rising prices, but the measures could have several detrimental consequences and prove counter-productive in the long run, besides creating several short-term problems,? said Roopa Kudva, managing director and CEO, Crisil.
The agency said unreformed sectors hurt the most during testing times, with the petroleum sector being a prime example. A complete overhaul of the petroleum pricing regime would be a superior policy alternative to capping prices. It is also critical to transmit the signal of high global crude prices to the end consumer, however unpopular the message might be rationalise usage. Measures that improve competitiveness or reduce costs of production, such as labour legislation and infrastructure development, will go a long a way towards supporting capacity expansion and easing pressure on prices in the medium term.
Asian countries have taken measures to correct the anomaly: Indonesia raised petroleum product prices by about 30%, and Sri Lanka by 24-37 %. Other countries where price increases are proposed include Bangladesh (37-80%) and Malaysia (20%).