A trade-off is inevitable

Balance the need for lower prices with investments and creation of jobs

Reduce prices and create jobs. This is the ideal economic outcome expected from all businesses today, not only in the long run, but also in the short term. Generally, lower prices allow more consumers to consume goods or services. However, instead of the market forces determining the price levels, is a reduction in price through intervention by courts/regulators/the government always in public interest? Can higher prices actually help consumers at large? 

Markets have existed since the dawn of civilisation, before modern governments and much before economic regulations were enacted. Consumers rely on the competitive market forces to set prices across most sectors of the economy including automobiles, food products, FMCG and consumer durables. Recognising the significance of free and fair competition, Parliament constituted the Competition Commission of India (CCI) which is actively engaged in checking any anti-competitive practices. It has been dealing with an increasing number of cases spread across sectors.

So, why should there be further government intervention in sectors where there are no natural monopolies? If the markets are not functioning effectively, the government can intervene by improving the market design. A case in example is the enactment of the Real Estate (Regulation and Development) Act, 2016. The intent of the Act is better disclosure of information to homebuyers and more effective contract enforcement. The Act leaves prices to be determined by market forces.

Competitive prices impact economic decisions of a variety of players, not just consumers but, equally importantly, producers and investors. Today, we are witnessing positions being taken by regulators, governments, courts and economic commentators on public policy issues on the premise that higher prices should be prevented.

• A few years ago, pricing of domestically produced natural gas was debated and commented upon. On one side was the concern about the impact of gas prices on power tariffs and government subsidies. On the other hand was the issue of finding more petroleum resources and facilitating investments to meet future needs. The Hydrocarbon Exploration and Licensing Policy enacted in 2016 provides for market-based gas prices.

• In the telecom sector, there is an ongoing debate regarding the reduction in interconnect charges (IUC).  Proponents of lower IUCs have justified that it would result in lower tariffs.  The counter view is that IUCs need to be adequate to allow incumbent players to recover their investments, as their networks are also required to complete calls. 

• In the health care sector, price controls have been imposed on items that are determined to be critical and important to the poor. The counter view is that adequate prices are required to recover costs and earn a rate of return that will serve as an incentive to innovate and invest.

The common thread in the above examples is the trade-off between lower prices in the short run and market-determined prices that can underpin investments and thereby create jobs in the medium to long term.

While in the regulated sectors the government/regulators can influence pricing outcomes, in open markets the participants collectively determine the prices and who gets what. Markets may or may not determine the outcome that a particular section of society would like to see. Just as democracy throws up governments that most citizens like, but not all may want.

Price signals are important not only for existing players, but also for new entrants, who may make investments and create jobs. Higher the prices, higher the profit motive for a much larger universe of entrepreneurs and investors. More the number of investors, greater the competition and higher the chances of competition bringing down prices, driving innovation and increasing efficiency in the production process.  

While debating and framing public policy, the need for lower prices should be balanced with the need for investments and job creation. Lower prices should ideally be achieved through greater competition and innovation by ensuring that markets function efficiently.  If markets are not efficient, then the intervention should be not to regulate prices, but to involve the competition authority or improve market design through regulatory changes.  

The author is executive director, Tax & Economic Policy Group, EY India. The views are personal