This is Part 4 of our series, 2017 in Review, and focuses on the Indian economy. You can read Parts 1, 2 and 3 on the political and legal landscapes respectively.
“Why won’t you die?” cried Mr. Creedy, after shooting six bullets into the heart of the character ‘V’ in the movie V for Vendetta. The masked vigilante retorts, “Beneath this mask there is an idea, Mr. Creedy, and ideas are bulletproof.”
You can imagine a similar sense of anguish and frustration of economists at certain economic ideas that seem not only bulletproof but also generally immune to evidence and economic reasoning. Bad economic ideas are like homeopathy, the 18th century system of medicine that continues to thrive today despite overwhelming scientific evidence that it does not work. Economic ideas such as price controls and prohibition have been tried and tested throughout the world and despite irrefutable evidence of the harm it causes, policy makers continue to gravitate towards such ideas.
The year 2017 had its fair share of terrible economic ideas.
Here a ban, there a ban
Bans are perhaps the most extreme form of government intervention in markets. It is a move that legally prohibits the production, distribution, sale, or consumption of certain products. Bans have a terrible performance track record. A ban just does not work, but is more of an elaborate and costly exercise in signalling. Policy makers like to use bans, as it is a clear display of the “right intentions”. The ban of any product usually moves that product underground and outside the purview of regulators. Prohibition of alcohol in the US and Mumbai showed that the problem takes on menacing proportions, when it moves underground. It is usually accompanied by the capturing of the market by crime syndicates, gang wars, emergence of spurious alcohol, increase in sale of narcotics and other substances, and increase in corruption and rent-seeking among officials.
The first instance discussed here, is more of a hangover (apologies) from the previous year, but the effects were seen this year as well. Bihar introduced prohibition in April 2016 and has witnessed, on expected lines, multiple instances of illicit and low quality liquor causing fatalities. Hooch tragedies are the inevitable effect of prohibition. In a span of 20 days in October-November of 2017, 8 people died after consuming illicit liquor in Bihar. Another 13 people had already succumbed to this in August 2016.
In April this year, the Supreme Court, in a clear case of judicial overreach, banned the sale of alcohol within 500 metres of highways in a bid to curb drunken driving. Many of these highways passed along the busiest commercial areas of cities and with this judgement, many bars, pubs and restaurants in cities were no longer allowed to sell alcohol. This resulted in the closing down of these establishments for a few months and loss of wages for thousands of workers, as state governments scrambled to denotify the highways.
The Supreme Court was also in the news for another ban – that of the sale of firecrackers in Delhi in order to mitigate the pollution. While pollution levels saw a slight improvement from previous years, the ban came just two weeks before Diwali. Traders had already stocked the inventory. This resulted in the creation of a black market for firecrackers (surprise!).
Many other parts of India saw the rise of vigilantism and crime due to a defacto ban on cattle slaughter. It was especially pronounced in the state of Uttar Pradesh, where the government cracked down on illegal slaughterhouses.
The Price is not quite right
Price controls are another preferred form of government intervention in the markets, which has resulted in devastating consequences. It is instructive to look at extreme cases like Venezuela and Zimbabwe to see how bad the situation can become. Price controls create shortages or excesses in the market, leads to the creation of black markets, and usually have highly undesirable unintended consequences. These second-order effects can easily be anticipated by economic reasoning yet, policy makers in India have taken a special liking to price controls this year.
In February, the National Pharmaceutical Pricing Agency (NPPA), in a stroke of compassion, capped the prices of coronary stents, resulting in as much as an 85% drop in prices for certain varieties. Stents that were priced at Rs 45,100 and Rs 1.21 lakhs were capped at Rs 7,260 and Rs 29,100 respectively. Along expected lines, the prices of procedures, rooms and all other complementary services saw a spike. There was also a shortage of stents with big producers withdrawing their latest products.
Unmoved by the evidence in the stent market, the Union government imposed a price cap on surgical knee implants, effectively reducing the price from Rs. 2,50,000 to Rs. 54,720. The NPPA also included formulations for the treatment of cancer, pain, heart conditions, and skin problems to the ever-growing list of essential medicines that have a price cap. It also tried to impose a price cap on luxury condoms, but fortunately, the Delhi High Court struck it down as invalid.
The West Bengal government took inspiration from the national authorities and passed a bill, which called for fixed hospital packages covering the entire gamut of medical treatment. Further, private hospital with over 100 beds was supposed to have a fair price medicine shop and a diagnostic centre. Any private hospital which received government help was obliged to treat 20% of its OPD patients and 10% of its indoor patients free of charge. The government of Karnataka, not wanting to be left behind, tabled a similar bill with price caps and an arbitrary extra constitutional grievance redressal body. Fortunately, the final bill omitted the price caps, after weeklong protests by the doctors.
The Karnataka government also forayed into the world of entertainment and decided to cap the price of movie tickets in multiplexes in Bangalore. What precise problem the government was attempting to solve will remain a mystery. In May 2017, it issued an order which caps the prices of movie tickets at Rs. 200, which was received with instant cheers. However, as with an price cap, this move has significant unintended consequences; it will create a market for black tickets, harm the small budget and indie-movies, cause multiplexes to shut down, increase prices of popcorn, beverages, and parking. (You can read these consequences in detail in an earlier article I had written here.)
The Gujarat state minister for education is firmly of the opinion that education is not a business, but a service. He remarked as such while tabling “The Gujarat Self-Financed Schools (Regularisation of Fees) Bill, 2017” in the Gujarat Assembly. The bill does not allow schools to charge more than Rs 15,000 for primary section, Rs 25,000 for the secondary and Rs 27000 for higher secondary classes. It is universally applicable to all schools in the state, irrespective of their affiliation to CBSE, ICSE, international or state boards. “…For those who want to earn profits should open a factory or a business establishment,” he suggested.
The Union government has introduced its version of one of the oldest forms of price control – minimum wages. The Code on Wages, 2017, still pending in the Lok Sabha, seeks to make minimum wages a statutory right for all citizens. The minimum wage, which will be higher than the prevailing market wage rate, will invariably result in either retrenchment of employees or a significant slowdown in new hiring or both. Studies from across the world tend to conclude that a minimum wage does not satisfy its original intentions – elimination of poverty – and will tend to increase unemployment and reduce family income.
There were plenty of trade controls that were carried out as well, in order to protect domestic producers. Import of electronics items saw a 10% increase in duties. Toor dal, massoor, channa, and various other agricultural commodities saw import duties levied on them in order to protect Indian farmers.
Government failures and populist schemes
Perhaps, the biggest distortion that was created in the market this year was courtesy the Uttar Pradesh government, when it announced a farm loan waiver. The poorly thought-out and even more poorly-implemented scheme will cost the UP state exchequer Rs. 36,400 crores and is guilty of more than just hurting public finances. At least two former RBI governors strongly opposed the move, stating that it destroys the economic and credit culture, as the 2009 nationwide farm loan waiver showed. The incentives for farmers to take repayment of loans seriously in the future will be severely reduced. It creates a situation of moral hazard. This means that loan waivers will beget more loan waivers in the future.
Bad ideas such as these are immensely popular, not just with the intended beneficiaries, but also with other politicians. Maharashtra and Punjab followed suit immediately and offered loan waivers in their states. Karnataka demanded the centre to step in and help with the finances for loan waivers.
The frustrating part about the loan waivers is that it is incapable of solving the underlying farmers’ distress. Agriculture in India has deep structural flaws and no amount of farm loan waivers can solve that. Yet, it is the easy way out for many elected governments and refuses to die as an idea.
When governments do not have the necessary capacity to tackle the underlying problems, they usually go for quick-fix solutions, which often end up causing more harm. Public health and sanitation in India is a real problem. Even in the 21st century, access to toilets for many in India is a genuine problem. The government has not been able to build public toilets. Instead, the South Delhi Municipal Corporation decided to nationalise toilets in private restaurants and hotels in a bizarre move. It mandated all hotels and restaurants in the area to allow access to their toilets to any person who wishes to use them. It graciously allowed them to charge a convenience fee of Rs 5.
When everything else fails, the final resort of any politician is to give out freebies. From scooters in Rajasthan, to laptops and sarees in Karnataka, every year witnesses multiple freebies distributed by the government, especially if the state is close to an election. It would be unfair to pick on any particular state for this, but Andhra Pradesh deserves a mention for the humour quotient. Of the many welfare schemes since the bifurcation of Andhra Pradesh, a whopping 21 of them are named after the current Chief Minister. Here’s a small sample: Chandranna Bima (insurance for accidents, death and disability for workers in the unorganized sector), Chandranna Sankranthi Kanuka (for distribution of subsidized essential commodities), Chandranna Ramzan Taufa, Chandranna Christmas Kanuka, and the Chandranna Kapu Bhavan (for the Kapu community).
Then, there is the business of government getting into businesses in which it has no business. Air India and nationalised banks are examples of the past. This year, there were instances of state government starting eateries and restaurant businesses in a bid to provide affordable and nutritious cooked food to the poor. There is no justification for such a move. It cannot be run efficiently and ends up distorting the market.
Clearly, reason, logic, and evidence cannot bring about the demise of these terrible economic ideas. The year 2017 bore witness to this. If anything, the terrible ideas only got more popular the world over. This state of affairs makes us economists groan and exclaim, “Why won’t you die?”.