Market intervention

The campaign for the state to step in to erase inequality can end up disturbing the demand-supply equilibrium

By Mohan Sule

Three recent controversies capture the essence of the tussle between state intervention and market forces. They raise important issues about the extent of freedom various stakeholders should enjoy. Take the 10th anniversary of the launch of the rural employment guarantee scheme. It provided an opportunity to revisit the need for the flagship project of the UPA government Soon after propelling to power, Prime Minister Narendra Modi credited the existence of the scheme to the failure of the socialistic policies of the Congress government. The NDA government pared allocation in the first year but increased it subsequently. Two years of successive deficient southwest monsoon perhaps contributed to the reckoning of its importance. Congress saw in the step-back a vindication of its pro-rural policies.The real reason perhaps is slightly different. The wages boosted the purchasing power of the agri-related population, leading to increased consumption of consumer durables and non-durables. In turn, the shareholders of these companies got enriched, bolstering economic growth.With the spigot turned off, this important constituency has shown withdrawal symptoms, affecting the top line and bottom line of a host of industries. The inescapable conclusion is that the money doled out was in effect a fiscal stimulus as no productive assets were being created. The Modi government is trying to correct the anomaly. What remains unsaid is that the GDP growth since the implementation of the scheme is a suspect. The cash infusion under the guise of the social welfare scheme might have contributed in a major fashion to the resultant food inflation that has left the central bank frustrated.

Even as introspection of the so-called success of the rural social program was under way, the cyber space was exploding with another battle. At stake was the ability to roam the Internet without barriers. Leading the attack were welloff net users, deploring attempts by services providers to offer free access to selective data. The tie-ups were viewed as a win-win deal by the ISPs and the content providers. Due to the policy shift against the backdrop of giveaways to cronies by the previous regime, all spectrum is now auctioned. The run-up in cost to bag circles was sought to be blunted by attracting more subscribers from the hinterland with the offer of free visits to certain sites. The developers, in turn, were aggressively promoting the scheme to get more eyeballs and, thereby, revenues. E-commerce sites are able to offer deep discounts due to supply agreements with manufacturers. What is perfectly okay for one set of players was criticized as an attack on restriction-free surfing of the net. At the forefront of the campaign were promoters of startups who had benefited from network connectivity to showcase their talent. They now feared established players’ edge in seeking collaboration with ISPs. The Telecom Regulatory Authority of India was swayed. What was the byproduct of market forces was nipped in the bud.The losers: the financially weak telecom users who would have graduated to using smartphones and been the potential customers of innovative ventures.

How good intentions get circumvented was amplified by the recent ruckus over mounting bad debts of PSU banks. Pre-1969, there were no government-owned banks. Banking functions were dictated by market forces. To bring into the mainstream the marginalized section, most of the private banks were nationalized. Norms of priority sector lending were introduced despite non-existent returns. Loan melas and loan waivers became the pre-election flavor. Licensing raj ensured that favored capitalists got access to cheap funds. Top appointments were made not based on capability but willingness to bend. The Reserve Bank of India recently directed banks to undertake controlled fusion of the rotten assets. The explosion brought down equities. If liquidity infusion is considered essential to create demand for goods and services and regulatory oversight necessary to create a level-playing field for net users, there should not be any scope to question the government’s use of the public sector to channelize funds to starved sections and create life-long employment. Regulators all over the world step in to prevent deals that would create monopolies or pricing inequality.Losers are the shareholders of enterprises that would have thrived only if they were left alone. Investors’ naively believe listing improves efficiency and prompts profit maximization policies. They have to keep in mind that the risk of distortion of the market might be outside the control of companies.