The face-off between the finance minister and the cement industry is interesting.
Here’s a quick recap. The minister imposed a differential duty on cement in the Union Budget last week. The tax on cement sold at the rate of below Rs190 a bag was cut by Rs50, while the duty on cement sold above that level was raised. The ostensible idea behind this unwarranted move was that cement companies would have an incentive to hold the price line at Rs190 a bag and help the government fight inflation.
Cement companies did exactly the opposite. They raised cement prices. The finance minister has now put out a veiled threat. “I hope they are not acting like a cartel,” he was quoted on Sunday. Economist Surjit S. Bhalla wrote in his weekly column in the Business Standard that the defiance shown by the cement companies “will go down in Indian history as the most important economic event of the past seven years,” since it shows that the private sector now has the confidence to stand up to the government.
We believe that the fracas also points to a step back to the 1980s style of economic governance, where the government believes that there’s a ‘right’ price for a commodity and that those selling above it are either profiteering or part of a cartel. But, if cement companies are earning excess profits, there will be more investment in new cement factories and a gradual decline in prices. And if there is a cartel at play—there has been talk of a cement cartel for several years—regulators should move in to ensure that it is busted. There is no role of a finance minister in all this.
The Budget speech had other examples of the old style of policy making. Recall what P. Chidambaram said about farm credit: “I propose to set a target of Rs2,25,000 crore as farm credit…” Who has to meet this target? Commercial banks, most of whom are listed on the stock exchange and have public shareholders. The finance minister had earlier tried to fix prices for these banks, telling them to not increase interest rates despite a rise in the cost of deposits.
Assume that this push to farm credit or an artificially low lending rate leads to a pile of bad loans. Who will pay? Investors and taxpayers, depending on how much of the losses are absorbed in bank balance sheets and how much is passed on to the public exchequer. Future borrowers too will be hit, if a rise in bad loans forces banks to go slow on lending. Surely economists in the finance ministry are aware of these issues.
The whole point of economic reform is that policy will be based on rules, not the personal whims of bureaucrats and ministers. That will leave the market to decide about output and prices. Yet, this government, for all its reformist credentials, keeps trying to intervene. Time and again, we get to hear ministerial statements about how they are proud of certain companies, or angry at some sectors, or what the targets for production in various parts of the economy should be, or how prices should be set. This was precisely the sort of dirigiste meddling that chained India to a low rate of economic growth for many decades.
Even a small step back towards the dark days of government meddling in private decision-making is needless. The cement-price controversy and the target-setting for banks show that old meddlesome habits have not disappeared. That is a cause for worry.
Is the government interfering in economic activity? Write to us at email@example.com