Undermining Markets: When Government Intervention Hurts More Than It Helps
Fact: Index of economic freedom is brought out by the heritage foundation. India wascategorized as ‘mostly unfree’ with a scoreof 55.2 in 2019 ranking the Indian economy129th among 186 countries, i.e., in thebottom 30 per cent of countries.
Fact: the Global Economic Freedom Index, which is brought out by the Fraser Institute, measureeconomic freedom as the freedom of choice enjoyed by individuals in acquiring and using economic goods and resources.In the Index of Global Economic Freedom too, India ranks 79th among 162 countries with 108th rank in business regulation.
Concepts:Economic freedom enhances wealth creation by enabling efficient allocation of entrepreneurial resources and energy to productive activities, thereby promoting economic dynamism.
Economic freedom leads to :
- Per capita GDP increases
- Density of new business firms increases
- Improve ease of doing business
- Positively corelated with Patents applied and patents Granted
- High Index of Innovation
Concepts : Indian economy is replete with examples where Government intervenes even if there is no risk of market failure, and in fact, in some instances its intervention has created market failure This may be partly due to the legacy of post-independence economic policies which the country followed.
Diagram of How government intervention creates problem following is the example of essential commodities act creating problem in wealth creation (Source Economic survey)
Flow chart for government intervention :
High prices of commodity —-à Excess amount of product for sale—à opportunity for producer —à Government Intervention-à Opportunity lost—àDead weight loss
Concept: How ECA interfere with the marketing mechanism of agriculture produce`:
- It weakens development of agricultural value chain.
- It inhibits development of vibrant commodity derivative market.
- It reduces producer profit.
- It reduce incentive to invest in storage.
- It leads to increase in the price volatility which is against the consumer welfare.
Concept: Another issue with the Essential commodities act is that it does not differentiate between the genuinely need to hold stocks owing to the nature of their operation and firms that might speculatively hoard stocks.
ECA destroy or distort market by increasing uncertainty and hence ECA has lost its relevance.
Concepts: What should be done instead of above intervention/ or to have better marketing mechanism
- Effective forecasting mechanism
- Stable trade policies
- Increasing integration of agricultural markets
|Concepts: The regulation of prices of drugs, through the DPCO 2013, has led to increase in the price of the regulated pharmaceutical drug vis-à-vis that of a similar drug whose price is not regulated. The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops. These findings reinforce that the outcome is opposite to what DPCO aims to do – making drugs affordable|
Concepts : There is negative correlation between increasing agricultural productivity and the amount of subsidy given. Instead focus should be on investing in agriculture Research and Development and Creation of agricultural intelligence.
|Government policies in the foodgrain markets has led to the emergence of Government as the largest procurer and hoarder of rice and wheat crowding out. This has led to burgeoning food subsidy burden and inefficiencies in the markets, which is affecting the long run growth of agricultural sector. The foodgrains policy needs to be dynamic and allow switching from physical handling and distribution of foodgrains to cash transfers/ food coupons/smart cards.|
Concept: Solution for positive Agricultural intervention
· Incentivize diversification
· Incentivize environmentally sustainable production
· Direct cash transfer and direct Investment subsidies
· Government should not decide the production and cropping pattern
· Conditional cash transfer on the line of Brazil and Mexico
|Concept: Analysis of debt waivers given by States/Centre shows that full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver when compared to the partial beneficiaries. Debt waivers disrupt the credit culture and end up reducing the formal credit flow to the very same farmers, thereby defeating the very purpose of the debt waiver provided to farmers.|
Summary of the chapter: Government intervention are hurting more than they are supporting and hence time has come for transition from a command control driven economy to a market driven economy. Government need to move out of those sector which are less prone to market failure. The observation of government intervention does not give a positive picture of the result achieved.