Column: Socialism to marketism

By: , and |
April 29, 2016 5:36 AM

Involvement of the state in markets must be consistent with its capacity

This year’s Economic Survey evocatively described the last 60 years of the Indian economy as reflecting a slow movement from ‘socialism with limited entry to “marketism” without exit’. The transition to the market economy has been capricious and has witnessed episodes of unprecedented growth averaging around 9% during FY05-FY09. Rapid growth however put enormous pressure on the quality of the underlying institutions necessary to support the evolution to a more complete and complex market-based economy. Coal, telecom, mining and oil, to name a few sectors, became victims of regulatory failure and capture, where judicial intervention emerged as a rule rather than the exception.

In Adam Smith’s world of perfectly competitive markets, price is all that is needed to coordinate economic activity—the “invisible hand” leads to optimal allocation under textbook conditions. In the alternative and perhaps more pragmatic view, prices alone cannot successfully coordinate all economic activity and their role is influenced and jointly determined by the elaborate web of institutions and social arrangements, including laws, regulations, social norms and the culture of enforcement, among others. Thus, the role of government is not to leave the market alone but to participate in the design and creation of institutions and, vitally, to discern when it is expedient to intervene and when it is not.

That this delicate balance is hard to achieve has come to the fore again in India in three different recent instances, each testing the decision-making capacity of the institutions charged (and, in some cases, not!) with the responsibility to resolve the boundaries between the state and the market. Consider the telecom sector first. In January 2016, regulator Trai disallowed Facebook’s Free Basics that sought to provide access to a limited Internet at a ‘deep discount’ to first-time users. Such price discrimination for data services based on content was seen to restrict consumer choice while severely distorting the playing field against small, innovative start-ups, the heart and soul of a pluralistic internet. The social outrage against Free Basics and the institutional preference in favour of neutrality tempered the invisible hand and, thus, the coordinating role of price was displaced by non-price social, cultural and institutional preferences reflected in the intervention.

Trai’s intervention on a retail price matter comes after several years of regulatory forbearance. The days of prescriptive prices for voice are well and truly over. There was a time when operators had to file tariff packages (for an administrative fee) 5 days before launch of any new tariff package. So deluged was Trai with such filings that in July 2005, there were 1200 different tariff packages in the market which led to the not-so-outrageous surmise that operators were testing Trai’s regulatory capacity to ex ante distinguish between kosher and not-so-kosher tariff filings. Fortunately, institutional capacity to judge tariffs was made redundant by the decision to let prices for voice telephony be governed entirely by the market.

The ban of surge-pricing by Ola and Uber in Delhi is an example of the unease an evolving state encounters with market forces. We doubt if a strong case can be made for subsidising Ola and Uber users. Extending the same logic to air travel would mean banning price discrimination by airlines, disallowing them from charging differently during the day (and night) and for different rows in the aircraft, etc. The seemingly good news (of the ban) would be that we will be rid of the occasional price gouging by airlines during festivals and civil disruptions ala shutdown of the National Highway in Haryana. Although many would contend that (negative) reputation effects of opportunistic companies would achieve the same outcome over a period of time. The bad news is that matching sudden bursts in demand with relatively inelastic supply will still need to occur. And this will happen as it has in India since long, through either rationing or the emergence of a parallel market. Remember Bajaj scooters, the dollar, fixed telephony or even the Ambassador car! Competition today delivers the telephone and the car to one’s doorstep, not to mention the dollar. There is no need for bribes to expedite delivery. Experience with surge-pricing might occasionally hurt but it can persuade sellers to provide more of the good in question and serve to cross-subsidise poorer users. Besides, there is an incentive to improve the quality of the asset over time. Banning price discrimination or mandating uniform-pricing can have the perverse effect of increasing average price across all users.

And finally, the case between Ericsson and local manufacturers of mobile handsets involving the determination of royalty for Standard Essential Patents (SEP) on Fair Reasonable and Non-discriminatory (FRAND) terms. Ericsson the creator of several hundred SEPs has maintained that Indian manufacturers such as Micromax, Intex and Gionee are dodging royalty for use of their patents in handsets. The latter allege abuse of dominance on Ericsson’s part. Several hard questions arise in this case, including perhaps the most contentious and difficult. Who decides FRAND terms if parties involved are unable to reach an agreement on royalty? Let’s look at the various (alarming?) options—the government, the judiciary, the Competition Commission of India (CCI), an independent third party? Aligning property rights with competition and competitive markets is always a hard task, especially in jurisdictions where institutional roles are unclear. In addition, institutional ability (or lack thereof) is an added weakness but there are no quick fixes here. In Indian jurisprudence, precedence charts the course we take, and it is important to give institutions space to develop in the first place without imposition of political preferences. Else narrow interests will play games of brinkmanship to capture the system and harm market development.

Governments have an enduring role to play in the provision of all manner of public goods-infrastructure, a strong property rights regime including institutions that enforce these rights and the rule of law. And involvement of the state in markets must be consistent with its capacity. If the intention in India is to give market forces a decisive role, establishing property rights and the rule of law is critical. Arguably, the telecommunications sector in India best reflects the benefits of establishing rules and creating institutions to enforce them. The first case described in this piece is an example of a decision taken after due process and consultation with stakeholders reflecting the delicate balance between state power and the market. There may be people opposed to the result, but there is no evidence of arbitrariness in the order. In case the state becomes arbitrary in the exercise of power, development of the market will be encumbered as perhaps in the second example. This should be studiously avoided. In the third example, the role of different institutions is still evolving but one thing is palpable. Market development will benefit when the behaviour of those who are charged to govern refrain from arbitrary action. Creating capacity and giving institutions independence to act will be a much added and attractive bonus. After all, Rome wasn’t built in a day!

Kathuria is director & chief executive, Icrier, where Urdhwareshe and Shreeti are research assistants

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