Farewell to free market

After a Budget that disappointed with its lack of reforms, the government is following up with a policy that can bring back the days when the prices of everything, including initial public offerings of companies, were controlled. In those days, prices were not allowed to go up, suppliers did not respond to price incentives by increasing investment in future supplies, and whatever was available got auctioned in the black market. Supply shortages were a natural corollary. All this changed after Dr Manmohan Singh's dashing charge in 1991, when India moved towards a free market economy. Over the past few weeks, however, the government has again been dictating prices. Unlike in the past, when government bodies controlled prices, it is now the finance ministry that has assumed that role. So, when the prices of pulses rose, the futures for arhar were banned without any evidence that the commodity was responsible for the general price increase. On the Budget day, the finance minister announced a similar decision by the Forward Markets Commission (FMC) on wheat and rice. The minister, however, distanced himself from the decision, as the FMC is, technically, an independent regulator. When steel producers raised prices in response to the rise in taxes and the global demand-supply position, a talking-to resulted in them rolling back the hike. A similar exercise was tried with the cement producers after an MRP-based excise failed, expectedly, to deliver the goods. When the producers refused to kowtow to the government, the commerce and industry ministers spoke of how the industry was profiteering (the FM had, in the Budget, announced what he thought was a "remunerative price" for cement!), and threatened to ban exports of cement to ensure that prices were controlled.

The moves are undesirable for a variety of reasons. Most importantly, not allowing free market play distorts price signals. With the economy growing at over 8 per cent for four years on the trot, and 9 per cent in the current year, it should be obvious that prices will go up if fresh capacity does not come up. This applies not just to cement or steel but also to all industries that have been functioning at near capacity for some time. If, however, prices are not allowed to rise, it is not clear how fresh investments will come in, since potential investors will see no upside. As in the case of the ban on commodity futures, there is little evidence that cement exports are the reason for the price rise, or that the price rise is excessive in comparison with the Rs 190 per 50 kg bag of cement, which the FM says is remunerative. For one, exports comprise just about 5 per cent of total supplies; demand is growing much faster. There is also the issue of cyclicality of prices/profits. Many industries accused of profiteering, including cement, are those that were operating on wafer-thin margins not too long ago. Surely, any talk of profiteering should have kept this in mind.