Economic Survey (2020) Chapter – 04 (Undermining Markets: When Government Intervention Hurts More Than It Helps) – Economics

Table of Contents

INTRODUCTION

Government intervention is usually well intended.
But it often ends up undermining the ability of the markets to support wealth creation.
This leads to outcomes opposite to those intended.
The chapter does not argue that there should be no Government intervention.
Instead, interventions that were apt in a different economic setting may have lost their relevance in a transformed economy.

India has made significant progress in enhancing economic freedom for firms and its citizens.
But it still counts in the bottom half.
The Index of Economic Freedom- by the Heritage Foundation. The Global Economic Freedom Index- by the Fraser Institute.

Economic freedom enhances wealth creation,
By enabling efficient allocation of entrepreneurial resources and energy to productive activities.

It is done either through-
Direct participation (as a market maker or as a buyer or supplier of goods and services)
Indirect participation in private markets (Regulation, taxation, subsidy or other influence)

Artificially low price leads to transfer of profits from Producers to Consumers.
Thus low incentive to invest further
Economic Survey says,
Indian economy is replete with examples where Government intervenes even if there is no risk of market failure.
In fact, in some instances its intervention has created market failures.

It controls the production, supply and distribution of, and trade and commerce in, certain goods such as vegetables, pulses, edible oils, sugar etc., which are treated as essential
The powers to implement the provisions of the Act are delegated to the States.
Aim of this Act is to ensure affordability of essential commodities for the poor by restricting hoarding.
Thus, when the price of any of these essential commodities rises, the regulator can impose stockholding limits on the commodity.
But as you know agriculture is a seasonal activity,
It is essential to store produce for the off-season to ensure smoothened availaibility of a product at stable prices throughout the year.

The ECA was enacted at a time when speculative hoarding and black marketing was a threat
As agricultural markets were fragmented and transport infrastructure was poorly developed.

The regulation of prices of drugs is done through the DPCO 2013.
This has led to increase in the price of a regulated pharmaceutical drug vis-à-vis that of a similar drug whose price is not regulated.

ECA needs to be repealed &
Replaced by market friendly interventions like-
Price stabilization funds, Direct Benefit Transfers (DBT), Incentives to innovations, Increasing market integration, Smooth flow of goods and services.

In trying to achieve FOOD SECURITY,
The state controls input prices such as- Fertilizer, water, and electricity, sets output prices, undertakes storage and procurement, & distributes cereals across the country through the PDS.
Food Corporation of India (FCI) was set up in 1965 under the Food Corporations Act, 1964 with the primary duty to-
Purchase, store, move/transport, distribute and sell foodgrains and other foodstuffs.

Thus the government, as the single largest buyer of rice and wheat, is virtually a monopsonist in the domestic grain market.
This disincetivizes the private sector to undertake long-term investments in procurement, storage and processing of these commodities.

The farmers need to be empowered through direct investment subsidies and cash transfers, which are crop
The coverage of NFSA needs to be restricted to the bottom 20%.
A better alternative would be giving income transfers to consumers through Direct Benefit Transfers (DBT).

Government intervention in credit markets,
In the form of full or partial, debt relief has become increasingly common at the state level in India.

An unconditional and blanket debt waiver is a bad idea.
It does not achieve any meaningful real outcomes for the intended beneficiaries while the costs to the exchequer are
Most importantly, debt waivers disrupt the credit culture and end up reducing the formal credit flow to the very same farmers it intends to help.
Thus a waiver can at best be an emergency medicine to be given in rare cases after a thorough diagnosis and identification of illness and not a staple diet.