The Indira Canteens will do nothing for the poor, will hurt legitimate businesses, and will be a waste of resources.
Oh, the irony! Naming the Karnataka government’s latest scheme to provide subsidised food to the poor after Indira Gandhi is almost a mocking testament to the failures of Garibi Hatao, and other socialist policies launched by Indira Gandhi. Just the fact that the government feels the need to set up canteens to ensure that the poor don’t go hungry, nearly 45 years after the initial Garibi Hatao programme, demonstrates that neither did the original socialist policies work nor have policy makers learnt from that failure.
Bad policies are contagious, but good policies require justification. Inspired by the Tamil Nadu’s Amma Canteens, the Karnataka government launched the Indira canteens (101 of them to be precise) with much fanfare last week, where one can get breakfast for as low as Rs five, and lunch and dinner for Rs 10. The canteens are the government’s bid to eradicate urban hunger and malnutrition, and are specifically targeted at the working class and migrant labour in Bangalore.
A Question of Quality
The Indira canteen has also been making the headlines for the wrong reasons. Mint reports “There has been talk of misuse of funds, and the canteens have come under fire for their location (some are inside parks and temples, and a few have come up in heritage structures).” The tender process has also come under scrutiny.
Crucially though, there have been valid concerns regarding the maintenance of quality of the food served in this canteens. Private entities are incentivised to maintain hygiene and quality to ensure that customers return to them. With a massive price advantage, the contractors who have won the bid for the Indira canteens face no such pressure. They are almost assured of returning customers due to a significant price difference with the nearest competitors. The only incentive to maintain quality comes from an agreement in the tender itself and fear of inspection from officials. It is almost unnecessary to mention the effectiveness of official inspections.
Is there a market failure?
Indeed, aiming to eradicate urban hunger is a noble intention. However, any government intervention in the markets, either in the form of regulation on existing players or its own entry, must be justified. It is always good practice to ask the questions Why is the government doing this? and Is it justified? Most importantly, we have to ask: Is this the best use of our resources?
The allocation of resources is best left to markets, which will produce the most efficient outcomes. The only acceptable justification for the government’s intervention in the marketplace is a situation of market failure.
Broadly, market failures are situations where the allocation of resources in the economy are inefficient, and thus, there will be either under-production/consumption or over-production/consumption of particular goods and services. Let us examine whether the Indira canteens are a response to a specific type of market failure.
Is it a case of public goods (where it is impossible to charge a customer for consuming a good or availing a service) and missing markets? Certainly not. Food served at restaurants is obviously excludable and rivalrous, which implies that it is profitable to engage in this economic activity. There is no dearth of eateries or restaurants in Bangalore. In fact, cooked food is both accessible and affordable in the city. There are various establishments that serve food at all possible price points. There are small eateries and even push-carts that serve essentially the same menu that Indira canteen does, and one is never too far away from a darshini in Bangalore.
In the same vein, there is definitely no concentration of market power in this sector. It would require a stretch of the imagination to argue that restaurant food is a merit good that has positive externalities. Yes, good nutrition will result in a healthier population that increases the productivity of the nation, and is therefore beneficial to everyone. However, this is the same argument that has been used to justify a multitude of other government interventions, both at the central and state level.
Anti-Competitive and Restrictive Trade Practices
The irony of naming the canteens after Indira Gandhi has many facets. Indira, you will remember, championed the notorious Monopoly and Restrictive Trade Practices (MRTP) Act, which was meant to curb the tendency of the private sector to accumulate market power through anti-competitive activities. Yet, this scheme is guilty of precisely the same error. It is an unfair trade practice and inherently anti-competitive in nature.
Hoteliers have been quite jittery about Indira canteens since the announcement in the budget, and with good reason. As mentioned previously, there are thousands of private entities that serve food at different price points. None of them would be able to compete with a behemoth chain that uses taxpayers money to subsidise its products. Indira canteens also have a huge scale advantage. The food that will be served in the 198 canteens will be prepared in 27 centralised locations.
The 5-star restaurants or even the large chains like Adigas and A2B might not immediately feel the pinch. The small hotels and push-carts that serve food will be the worst impacted. They are now competing for the same clientele with the government, which has taxpayers money behind it, and that makes it a no-contest. These businesses will have to be shut, and since they would be unregistered vendors, they will not be even a dot on government statistics. Further, spare a thought for the waiters, cooks and cleaners that work at these establishments who will lose their jobs. They are the exact ‘working population’ that the Indira canteens aim to serve. Steal their job and serve them subsidised meals. Again, see the irony.
Further, as with any other subsidy scheme of the government, targeting will be the biggest problem. The Indira canteens are meant for the poor and the working class. Yet, reports on Day 1 had pictures of ‘techies’ lining up. This could be a result of curiosity in the opening days, but it wouldn’t be hard to imagine that relatively wealthier people would also like cheap food. After all, who doesn’t want a subsidy in India?
No Free Lunch
Milton Friedman’s famous adage to describe opportunity cost is relevant here: “There is no such thing as a free lunch.” The Karnataka government has allocated Rs 100 crores for this scheme, and it is important to note that it is a recurring expense. The government will have to spend an increasing amount each year to keep this going. The natural question to ask is, Could this money have been spent better?
The food subsidy is a transfer and, thus, a revenue expense – the government does not get any return on it, unlike capital expenditure. Building roads and bridges give the government return on investment over time.
It could also be asked, Is it not better to create jobs for the population that will enable them to purchase food at the market price, instead of making them dependent on government largesse?
Indira Canteens is just another scheme in the long list of populist schemes launched by this government this year. We are, after all, in an election year in Karnataka. There has been a multitude of ‘Bhagya’ schemes, where rice, sarees, cycles, laptops and LPG cylinders are given free to the poor. None of these schemes will remedy the underlying problems and raise the income levels in the state. They are neither justifiable nor effective in achieving their outcomes. They will have large negative and unintended consequences for the economy.