Undermining Markets: When Government Intervention Hurts More than it Helps

Government intervention, though well intended, often ends up undermining the ability of the markets to support wealth creation and leads to outcomes opposite to those intended. Four examples of anachronistic government interventions:

1. Essential Commodities Act (ECA), 1955

Frequent and unpredictable imposition of blanket stock limits on commodities under ECA distorts:

• The incentives for the creation of storage infrastructure by the private sector.
• Movement up the agricultural value chain.
• Development of national market for agricultural commodities.
• The Ministry of Consumer Affairs must examine whether the ECA is relevant in today’s India. With raids having abysmally low conviction rate and no impact on prices, the ECA only seems to enable rent-seeking and harassment.
• Survey suggests there is clear evidence for jettisoning this anachronistic legislation.

2. Drug Price Control under ECA

The regulation of prices of drugs, through the Drug Price Control Order (DPCO) 2013, led to increase in the price of the regulated pharmaceutical drug vis-à-vis that of an unregulated but similar drug.

• The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops.
• These findings reinforce that the outcome is opposite to what DPCO aims to do - making drugs affordable.
• Government, being a huge buyer of drugs, can intervene more effectively to provide affordable drugs by combining all its purchases and exercising its bargaining power.

3. Government Intervention in Grain Markets

Policies in the food-grain markets led to:

• Emergence of Government as the largest procurer and hoarder of rice and wheat.
• Crowding out of private trade.
• Burgeoning food subsidy burden
• Inefficiencies in the markets, affecting the long run growth of agricultural sector.
• The food-grains policy needs to be dynamic and allow switching from physical handling and distribution of food-grains to cash transfers/food coupons/smart cards.

4. Debt Waivers

Analysis of debt waivers given by States/Centre:

• Full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver, compared to the partial beneficiaries.
• Debt waivers disrupt the credit culture.
• They reduce formal credit flow to the very same farmers, thereby defeating the purpose.
• Government must systematically examine areas of needless intervention and undermining of markets; but it does not argue that there should be no Government intervention.
• Instead it suggests that the interventions that were apt in a different economic setting may have lost their relevance in a transformed economy.