Economic Survey makes a case for economic freedom; less govt interventions

Retail inflation in onion had crossed 300% in December

The Economic Survey, presented in Parliament on Friday, made a case for doing away with outdated government interventions, arguing that they hurt more than they helped.

“Anachronistic government interventions” like the Essential Commodities Act (ECA), drug price controls, farm debt waiver, and those in food grain markets stifle “economic freedom”, which undermines the ability of markets to support wealth creation, it said.

“… Each department and ministry in the government must systematically examine areas where the government needlessly intervenes and undermines markets ... Eliminating such instances will enable competitive markets and thereby spur investments and economic growth,” the Survey noted. It added interventions that were apt in a different economic setting might have lost their relevance in a transformed economy. On doing away with the ECA, the Survey pointed out the frequent and unpredictable imposition of blanket stock limits on commodities neither brought down prices nor reduced price volatility. 

Rather, it distorted incentives for creating storage infrastructure by the private sector and discourage movement up the agricultural value chain. Giving examples of the recent onion crisis, the Survey said stock limits in September last year made retail and wholesale prices volatile, because “lower stock limits must have led the traders and wholesalers to offload most of the kharif crop in October itself which led to a sharp increase in the volatility from November”.

Retail inflation in onion had crossed 300 per cent in December. “The Ministry of Consumer Affairs must examine whether the ECA is relevant in today’s India … With raids having (an) abysmally low conviction rate and no impact on prices, the ECA only seems to enable rent-seeking and harassment,” the Survey said.

Similarly, the Drug (Price Control) Order, 2013 (DPCO 2013), led to an increase in the prices of regulated pharmaceutical drugs vis-à-vis those of unregulated but similar drugs. The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than in retail shops, it pointed out.

According to Economic Survey estimates, the DPCO led to a 21 per cent increase in prices of cheaper formulations (i.e. those that were in the 25th percentile of the price distribution). However, in the case of costly formulations (i.e. those that were in the 99th percentile), the increase was about 2.4 times. The effect of the DPCO, 2013, in increasing prices was, therefore, more potent for more expensive formulations than for cheaper ones — reinforcing the effect opposite to what it was instituted for, i.e. making drugs affordable, it noted. “Government, being a huge buyer of drugs, can intervene more effectively to provide affordable drugs by combining all its purchases and exercising its bargaining power … Ministry of Health and Family Welfare must evolve non-distortionary mechanisms that utilise government’s bargaining power in a transparent manner,” said the Survey.

The Economic Survey made a case for repealing or amending the following Acts: Factories Act; ECA, 1995; Food Corporation of India, 1965; Sick Textiles Undertakings (Nationalisation) Act, 1974; Recovery of Debts due to Banks and Financial Institutions Act; and Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act.

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, introduced in 2013, which regulates land acquisition with 80 per cent of the land to be acquired through negotiations, tilts the balance in favour of landowners, who need to be made an equal partner in developing land and sharing the benefits and costs with the developer/acquirer. As for foodgrain markets, the government’s policies of procuring cereals lead to a costly foodgrain economy, adversely affecting competition and acting as a disincentive for crop diversification. Policies for the foodgrain market have led to the emergence of the government being the largest procurer and hoarder of rice and wheat, besides crowding out private trade and increasing the food subsidy burden. Inefficiencies in the markets are affecting the long-run growth of the agricultural sector, it said.  

“The food-grains policy needs to be dynamic and allow switching from physical handling and distribution of food-grains to cash transfers/food coupons/smart cards,” said the Survey. 

Making a case against full debt waivers, the Survey said the beneficiaries of full debt waivers “consume less, save less, invest less and are less productive after the waiver, compared to the partial beneficiaries”. 

Karnataka, Rajasthan, Madhya Pradesh, Maharashtra, and Punjab have announced loan waivers in the past three years. 

The Survey said debt waivers disrupted the credit culture and reduced formal credit flow to the very same farmers.

Acts that need to be Repealed, Amended 

• Factories Act, 1948   
• Essential Commodities Act (ECA), 1955 
• Prevention of Black marketing and Maintenance of Supplies of Essential Commodities Act, 1980  
• Sick Textile Undertakings (Nationalisation) Act, 1974 
• Recovery of Debts due to Banks and Financial Institutions Act, 1993  
• The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013