Bhupesh Bhandari: The evils of crony socialism

It is matter of great relief that the evils of crony socialism are finally being talked about. Governments across the political spectrum indulge freely in it, which makes me believe that full economic liberalism is still some distance away in the country.

I will stick to seven examples that show how, in the name of public good, distortions have been introduced, which will do us more harm than good. There are many more such cases, but these seven should suffice for the time being.

A few years back, the Congress-led United Progressive Alliance mandated that companies, of a certain size, need to spend two per cent of their net profits on their corporate social responsibility.
 

My argument is very simple: companies are formed to maximise returns for their shareholders, not to do charity. Then why force them? Yes, such work is desirable but the world over it is businessmen who organise philanthropies, not companies.

Now look at aviation. Every time during the busy season, fares begin to rise. And this exercises the Union aviation ministry, and the minister issues a stern warning to "errant" airlines and threatens to impose a cap on fares. This is a routine that is played out at least twice every year.

Fares rise because there is shortage of capacity, and the high fares will induce airlines to press more aircraft into service. The problem will sort itself out. Put a cap on airfares and you will ruin the industry.

And, when you have flexible pricing in railway tickets, which is the right thing to do, why not airlines? Yes, it is possible for airlines to collude and inflate fares, but that is a matter for the Competition Commission to investigate. By fixing airfares, the government is barking up the wrong tree.

The industry afflicted the most by intervention is pharmaceuticals. The ever-expanding list of drugs under price control has made India the toughest place to do business in the world. That is why those who can afford it have decided to focus on overseas markets. Low price also means low quality - companies find no other way to stay afloat apart from cutting corners - and low innovation.

Medicine for poor people is important, especially because of the low levels of medical insurance in the country, but why must the burden fall on the industry? Won't it be a better idea for the government to procure medicine from the companies and then sell it at the price it wants? This will ensure that the industry stays healthy.

Something similar happens in the sugar industry in Uttar Pradesh. For several years now, the state government has fixed a very high price for sugarcane, which is totally out of sync with sugar prices. As a result, there is widespread pain in the industry and companies owe large sums of money to the sugarcane farmers, in spite of good results for 2015-16.

It works beautifully: the party in power reaps the political dividends from fixing high sugarcane prices, and the tab is picked up by the industry. A committee under a very learned man has suggested a mechanism to link sugar and sugarcane prices, but that has not caught the attention of the Samajwadi Party government in Uttar Pradesh.

Often, governments take decisions in the name of consumer protection which totally defy logic and rational thinking. The best example of this is net neutrality. Carriers should not have the right to decide which websites people should visit, activists said. The National Democratic Alliance government acquiesced and disallowed any scheme where subscribers could surf some sites at a lower price.

The idea of a website is to get traffic. For a newcomer, or a less popular one, a good way to get going is to tell subscribers than if you go to its site, it will pick up the cost of surfing. This happens in every market. Subsidy is a legitimate business tool.

Or let's talk about surge pricing, the bugbear of the Aam Admi Party government in Delhi during the road rationing drive in April. Any service, or commodity, that is in short supply will see a rise in its price whenever demand peaks. That is what happens with taxi services as well. There is no need to get exercised about it. The fact is that surge prices enable the taxi aggregators to offer very low fares at peak hours.

Then, last month, the NDA government issued a notification to cap the licence fee for all new genetically modified seed technologies and also to regulate bilateral agreements between companies. Under pressure, it rightly withdrew the notification and said that it would move on the subject only after it has got the feedback from the people.

Market intervention is standard practice in India - and there is broad agreement amongst the political parties about it. Unfortunate.