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Business News/ Opinion / Seeding the ground for stagflation
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Seeding the ground for stagflation

Price controls by the government on drugs would lead to withdrawal of supply, following by creation of black markets

When governments focus on the here and now and in an ad hoc manner, unintended consequences result. Photo: Hemant Mishra/MintPremium
When governments focus on the here and now and in an ad hoc manner, unintended consequences result. Photo: Hemant Mishra/Mint

Over the weekend came the news that Abbott Laboratories would withdraw two types of stents from the Indian market because the price at which the government has now mandated that they be sold is not viable for them. That is what my daughter, who is majoring in economics and history and studying for her school final exams starting in May, would have said too. It is Economics 101 and supply shortage or withdrawal is the most natural, immediate and lasting consequence of price controls. We thought we had settled those issues. Private-sector bashing is back in fashion. We are back in the 1970s.

Many of us—including those who spout economic jargon freely—do not understand market economics, nor do we live by its principles when it starts pinching us. However, ordinary folks understand competition, short-term and long-term and shortages. Failure to talk in the language that they understand is not their problem but a reflection of our laziness, of diffidence in our articulation and of weakness in our convictions. In their name, we are harking back to failed methods. That is a pity.

Gujarat has imposed caps on school fees and the West Bengal government has capped the fees that hospitals charge. While piloting the Bills, the respective ministers in both states resorted to standard rhetorical tools. They played up anecdotal stories that tug at our heart and spark our outrage at the inherent unfairness of the behaviour of rapacious promoters of schools and hospitals. In a similar vein, Prime Minister Narendra Modi has said that his government has already stipulated price controls on 700 drugs and want to make it mandatory for doctors to prescribe generic drugs. This is a slippery slope.

When I shared these stories with a knowledgeable friend, he made two valid points. One is that as long as the state cannot effectively ensure drug quality, it cannot and should not do away with branded medicines.

Two, only in weak states do branded generics exist. He is right on both counts. On the first point, it applies not just to medicines but more broadly to healthcare and also to education. Why deprive people of choices? That is what price controls do and that is why this column began with the story of Abbott Laboratories shuttering production of stents in India. 

The government has many other tools at its disposal to ensure that prices are reasonable yet remunerative for producers. It has regulatory bodies. It can rely on random inspections. It can offer viable competition. If government-run schools and hospitals provide quality education and quality healthcare, why should people look for such services from greedy private producers?

When governments focus on the here and now and in an ad hoc manner, unintended consequences result. For example, in the name of implementation of the right to education, state governments across the country are forcing many private schools to shut down. New ones set up by minorities are taking their place, as they are exempt from the provisions of The Right of Children to Free and Compulsory Education Act. Thus, the government has prepared the ground for social re-engineering.

In his remarks at the meeting of the governing council of NITI Aayog held over the weekend, the Prime Minister, among other things, stressed the simultaneous conduct of elections and the changing of the financial year to synchronize with the calendar year. Conducting simultaneous elections to state legislatures and Parliament would be of little help in warding off reckless populism if there is inadequate consultation, reflection and preparation before policy decisions are made.

The NITI Aayog website has put up the slide presentations made by its chief executive officer. India needs to augment its supply capacity in the areas of health and education. That is what slide No.15 shows. Price controls would drive up prices as they lead to the withdrawal of supply. Black market and black money generation will follow in the wake of unmet demand. All these run counter to the stated intention of the government to create “less-cash" societies.

In the monetary policy report released by the Reserve Bank of India (RBI), there is a chart (III.14) of India’s output gap. Since the end of the financial year 2011-12, it has been in negative territory for the most part. In other words, the Indian economy has been underperforming its potential for quite some time now. The RBI has not shared with us its estimate of the potential and the actual output series it had used. We can guess. In 2013-14, the International Monetary Fund estimated India’s potential growth at around 6.5%. The RBI’s estimate of India’s potential growth too is not very different (See: India’s Potential Output Revisited—a paper published by the RBI on 21 April 2016). 

Therefore, its estimate of a 1.5% negative output gap in 2013-14 and of around 1% in 2016-17 suggests that the actual output growth it is reckoning with is much lower than what the Central Statistics Office is putting out. Probably, its estimate is closer to 5% for 2013-14 and a little less than 6% now. If recent short-term-oriented policy decisions continue, India will find itself revisiting the stagflation it experienced in the final years of the United Progressive Alliance government.

V. Anantha Nageswaran is the co-author of The Economics Of Derivatives and Can India Grow? Read Anantha’s previous Mint columns at www.livemint.com/baretalk

Comments are welcome at baretalk@livemint.com

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Published: 25 Apr 2017, 01:00 AM IST
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