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Do-gooder economics and the Lokpal

T N Ninan  |  New Delhi 

is silent on the root of the problem.

did not produce small diesel car engines anywhere in the world, until it set up a plant to make them in Haryana. Honda has been a maker of petrol-driven cars, but is now developing a diesel engine for the Indian market. Firms like and that initially came into the Indian market with petrol vehicles have switched focus to diesel. Any car company that wants to get volume sales in India has had to take the diesel route.

Why? Because diesel costs Rs 41 per litre (in Delhi), while petrol costs 60 per cent more, at Rs 65. So diesel cars outdo petrol car sales by a wide margin — although environmentalists have argued for years that diesel is the more polluting fuel.

It gets worse. even less (Rs 17 per litre), and is freely used to adulterate both petrol and diesel. The marketing head of an oil marketing company once confessed that half the petrol sold in Delhi was so adulterated. It’s a safe bet that oil company executives, policemen and local politicians plus sundry mafia types in the trucking business are all in on the scam, or it would not go unchecked. In a city with one-sixth of the country’s vehicle population, this particular scam must be worth many thousand crores of rupees.

The name of the game is market distortion — and it is the central, time-tested feature of Indian socialism. Not just in the 1970s heyday of that socialism, when income distribution was sought to be re-engineered with income taxes that went as high as 97 per cent (result: widespread tax evasion), when was sought to be brought down through price controls (result: black markets), when imports were controlled through licensing restrictions (result: smuggling) and when manufacturing capacity was directed towards products favoured by the (result: shortages of the goods people wanted).

Twenty years after economic reforms began, you’d think that those bad old days are over, but market distortions are once again the flavour of the political season (not that they ever really lost favour). Cooking gas is sold at two prices: Rs 400 per 14.2 kg cylinder for households; Rs 1,250 or thereabouts per 19 kg cylinder for the commercial market. You could have guessed the result: scamsters have stepped in to divert from one market to another. A small army of the kind that a future might employ is deployed to carry out nearly 60 raids every week to detect such diversion — which of course goes on unchecked.

Electricity connections for farmers are free, or virtually free, in many states; so the number of “agricultural connections” has ballooned. Families with cards that declare them to be “below the poverty line” (or BPL) get government-subsidised grain at a fraction of the price that others do; so guess what? While the number of “BPL families” in Karnataka, according to the central government, is 3.2 million, the state government says it is 9.9 million. The total number of families in the state is about 12 million, so 83 per cent of the families in one of the country’s better-off states are below the poverty line! If the Centre wants to conduct a survey to check that claim, the cry goes up that the “neo-liberals” in New Delhi are anti-poor! Karnataka, let it be added, is not alone in achieving the miracle of near-universal poverty.

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The scope for market distortion is now growing. Make-work programmes paid for by the government (of which the is the most ambitious example) are driving real work out of the market. As agricultural wages have gone up by more than 20 per cent annually in recent years (by much more in some states), farmers are forced to look for labour-saving options—which paradoxically add to the unemployment problem. In Kerala, many farmers decided long ago to stop paddy cultivation altogether, because it became unviable at the government-determined wages that had to be paid. So real work gets reduced, and make-work flourishes.

Pressure now grows for government-funded labour to be deployed on private farms—but of course only on the farms of people who belong to the scheduled castes and tribes and other socially acceptable categories, for specified kinds of work. Since fake muster rolls already bedevil make-work programmes, it is easy to guess how these nice-sounding stipulations will be observed in practice, and how much of the government-paid labour will be deployed on the sarpanch’s land instead. Start with one distortion, and then create a “solution” that mimics and thereby magnifies the distortion.

What about industrial labour, at a time when the government wants to give a push to India’s The minimum wage in China’s town and village enterprises (TVEs), which account for much of that country’s manufacturing and export prowess, is the equivalent of about 64 cents per hour (it is three times as much in a special economic zone like Shenzhen). For a 200-hour working month, the wage in a TVE is therefore $128, or about Rs 6,600. The minimum wage in parts of India is no lower, and in most manufacturing plants is much higher, though India’s per capita income is less than half China’s. Is it any wonder that sectors that China vacates as it moves up the income ladder are being taken up by Vietnam and Bangladesh, more than India?

Even larger distortions are about to be introduced into an already scam-ridden food market. If half the total foodgrain offered in the market is to be picked up by the government, and two-thirds of that is to be sold at prices that are about 15 per cent to 20 per cent of cost or market price, why shouldn’t this lead to a repeat of what happens with kerosene and cooking gas? In some ways, this is already the reality.

Last year’s official said that between 40 per cent and 55 per cent of the foodgrain that goes through the government system leaks into unintended channels. Taking the lower figure of 40 per cent, total government-supplied grain at 50 million tonnes, and on average a subsidy per tonne of Rs 8,000 (i.e., Rs 8 per kg), the size of the annual scam works out to Rs 16,000 crore. That figure will grow once the food security programme is established and the quantum of government-supplied grain increases. Oh for just the Bofors scale of scams!

Could it be that these distortions and scams (all of which are well known and accepted as part of the Indian reality) are the result of well-intended do-goodism becoming counter-productive, of bleeding-heart socialism gone wrong? At worst, the gullible might say, the accusation could be that the ruling alliance is buying the votes of the poor at government cost (a.k.a. populism). But the massive leakages of kerosene, electricity, cooking gas and foodgrain create gigantic vested interests. If you want proof, look at how executives of oil marketing companies get killed when they go after the crooks, and at how officials of electricity distribution companies get attacked when they tackle power theft. The political system is intricately woven into these networks of scamsters.

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In an earlier era, politicians, policemen and government officials were complicit in permitting smuggling, and black marketing (and they didn’t do it for love of smugglers and black marketers); they are now active in enabling fake muster rolls at panchayat level when it comes to the make-work programme, and adulteration of petrol and diesel with kerosene when oil-carrying trucks disappear for a while en route to gas stations. This is not one Raja in New Delhi working a solitary scam, it is a broad-based, continuous creaming machine that feeds those in the political hierarchy. The poor provide a convenient cover, because the enabling policies are formulated in their name.

Left-leaning economists like to justify such government intervention in the name of market failure. The poor are often not part of the market and therefore need the state to step in, goes the argument. And liberals feel good about vast fortunes being spent to help people at the base of the pyramid. Trouble is, India’s history of government intervention doesn’t flow from market failure as much as creates it — like excise duty distortions which in the 1980s made this the only country in the world where TV-set assembly was a small-scale business! Research shows that some 85 per cent of the garment factories in India employ fewer than eight people; in China, which is the king of the garment market worldwide, less than 1 per cent of factories are that small. Market distortion has made a volume business into a small-scale business in India; our garment exports have stayed small-scale too.

The essence of the reform programme of 1991 was to attack this approach to policy-making, to reduce if not remove the distortions. Twenty years later, however, the ancien regime is back with a vengeance — it was in the name of garibi hatao earlier, now it is in the name of the aam aadmi.

Why rake all this up now, at the start of 2012? Because the hyper-ventilating leaders of an anti-movement who roiled the waters for most of 2011 have not thought it necessary to say one word about how it is government-induced market distortions that lie at the root of in so many sectors, and how reforms of the 1991 variety might provide solutions — indeed, better and more lasting solutions than sending hounds after every babu who yields to temptation. Not just and his cohorts, most ordinary people can now see that no political party really wants a But shouldn’t it be equally obvious that no political party wants reform either — because at the Centre, in the states, in panchayats, politicians of every party hue are the direct or indirect beneficiaries of government-induced market distortions that bring about market failure, and opportunity for scamsters?