Few politicians are inclined to believe economists when they argue the counter-intuitive point that what are seen as pro-consumer policies are in reality anti-consumer since, over the medium-to-long term, they restrict supply. Politicians may wish to ban the export of commodities whose prices are rising, or stop futures trading in them, as has been done in the past few months, but any relief on the inflation front will be strictly temporary. Economists focus on the systemic argument that not allowing the market to work prevents suppliers from getting the right price signals, and so they don't add new capacity and change the supply-demand balance in such a way that prices fall. But politicians live for the day and don't worry overmuch about tomorrow. Perhaps they will take a longer-term view of issues after studying what has happened to the supply of cooking gas (or liquefied petroleum gas, LPG). | |
| As this newspaper's report on the LPG shortage showed, the huge difference between the prices of LPG used for industrial and domestic purposes""industrial LPG prices are going up as a result of hardening global prices of petroleum products while household LPG prices are fixed administratively""has resulted in household LPG supplies getting diverted to the industrial sector. As a result, the waiting period for new domestic connections now extends to several months and the order backlog for refills of LPG cylinders stretches to a few weeks. Should the shortage get worse, even pampered consumers who resist all price increases in this sector might say that they would prefer to pay a higher price for their cooking gas, rather than not have it at all. With Reliance Industries, which supplies a very large portion of the LPG supplied to the household sector, asking the government to allow it to sell its output at a higher price that is closer to the global market price, the situation is set to get worse. If the government does not hike LPG prices for the household sector, Reliance will curb supplies at some stage (just as it has diverted part of its sales of petrol/diesel from the domestic market, where prices are controlled, to the export market) and perhaps even the state-owned oil companies will do the same thing. That would be a lesson that the laws of economics do work. |
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| Another such lesson can be had from the power sector, where too the sustained under-pricing of electricity has meant that there are not enough customers who pay a remunerative price to the producers of electricity. The result is that little new generation capacity has come up over the past several years and electricity shortages are in the 15 per cent range for the country as a whole - for the western region, the figure is a staggering 26 per cent. In the agriculture sector, similarly, not allowing futures trading for many years, and then stifling it once allowed, has meant that government procurement prices are the main signal to producers. |
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| The interval, when markets are seen to be failing, is good for only those investors who have a very long-term view of the market. Any interference in the markets, though done with good intentions, could have consequences that the political class can scarcely comprehend. |
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