Opinion Economic never-never land
India was never told the hard logic of market pricing...
As a country we seem to live in a state of nirvana. The discipline of strategic policies and planning was quietly given up almost two decades ago,so quietly that the logic of markets was never explained. Even as he brought in a Hayekian world with a vengeance,PM Narasimha Rao talked Nehrus socialism right up to his defeat in 1996. His successor,understandably,did not want to be the bearer of bad news either. People like me,looked upon as outsiders,wrote on the need to be real. But the minister who succeeded me dropped the requirement that CERC pricing be mandatory and the minimum agricultural tariff clause from the draft bill I introduced in Parliament in 1997. This later destroyed the Electricity Act. One could cite the story of fertilisers or grain,where modulated subsidies for equity or efficiency were thrown overboard. This means that the country still thinks that all prices are only costs and economists are dispensable.
Kaushik Basu is an outsider and started well by taking the position that a rise in prices will reduce the deficit and reduce prices. At one level this is a tautology that some sneer at. I was once asked why I support a truism which a tautology is (in the sense that it need not be scientifically tested since it is defind in a manner that it is true) my answer was that I dont believe in falsisms. But at least someone is saying that in a political decision there is an economic bottomline. Otherwise,while you dont say so,prices must be fixed as in a plan which allowed a 5 per cent increase in prices over five years and all quantities were distributed accordingly. In this view all prices are only costs. That is not a truism,for while its true that most prices are costs,they are not only costs and even Kaushik is not saying so.
In 1992,when we quietly signed an agreement with the Bretton Woods institutions to jettison a lot of controls,we needed to explain to our people that we will now,subject to some restrictions and regulations,follow free markets and that means that prices at home and abroad will not only be costs,but will also play a role in allocating resources. They will also determine incomes. I was a part of a gang which did it in the second half of the 80s but we would blow our trumpet on domestic reform first,global later,price decontrol and moving over from controls to financial instruments. I didnt do the reform of the early 90s,in fact I was a mild critic of the phasing and harmonisation behind it,but I do know enough economics to say that no one really explicated the basis of our policies. An increase in fuel prices will not only increase some costs. It will also encourage people to use energy more efficiently. Underlying almost all the climate change models which Jairam Ramesh inflicted on a largely uninterested population,was the assumption that we will follow sensible energy pricing policies. So its not only efficiency now but equity between us and the future are you going to be fair to your grandchildren or not? Of course prices are also purchasing power and incomes and for the life of me I dont understand why we cant put in more money into public transport,mini hydels,solar chullahs and the works,while raising the price of fossil fuels.
Of course we should not be efficient only in fuel. There is the price of fertiliser and grain once you begin,it leads to the question,why not more? The cost of protecting some fertiliser factories is very high in terms of the fuel wasted per unit of urea produced. But the powerful market incentives placed in that report for energy efficient urea production remain in a government silo,to use a phrase Montek Ahluwalia invented.
We are talking here of saving about ten thousand crores in fuel cost. You went out of the way to reject the Alagh Committee on tariff policies for agriculture,although the logic of the situation brings you back to it in myriad ways.
When people are hurt they will be angry,but it is the dharma of an economist,whos not entering a popularity contest,to say that some prices have to rise for all of us to be better. I dont believe in free markets for a strategic vision is the heart of policy in a poor country,but living in western India I know that some things markets do better than economists and babus and we must use them,where they work.
The writer,a former Union minister,is chairman,Institute of Rural Management,Anand
express@expressindia.com
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