New Delhi: Citing examples of government intervention gone wrong, the Economic Survey has called for a review of the Essential Commodities Act (ECA) and Drug Pricing Control Order (DPCO).
The survey pointed out that 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.
To rationalize this, it has cited four examples of government interventions that have not worked.
Essential Commodities Act (ECA), 1955: The Survey noted that the 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.
It said that the imposition of stock limits on dal in 2006-Q3, sugar in 2009-Q1 and onions in September, 2019 spiked the volatility of the retail and wholesale prices of onions.
The Economic Survey has said 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, it said, adding that there is a clear evidence for jettisoning this anachronistic legislation.
DPCO: Similarly, for Drug Price Control under ECA, the survey noted that the regulation of prices of drugs, through the 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, the survey said.
Instead, the 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.
The Ministry of Health and Family Welfare must evolve non-distortionary mechanisms that utilise government’s bargaining power in a transparent manner.
Grain Markets: It has also cited the case of government intervention in grain markets which led to government becoming the largest procurer and hoarder of rice and wheat, crowding out of private trade, burgeoning food subsidy burden. This is in turn led to inefficiencies in the markets, affecting the long run growth of agricultural sector.
The recommendation coming from the Economic Survey is that the food-grains policy needs to be dynamic and allow switching from physical handling and distribution of food-grains to cash transfers, food coupons and smart cards.
Debt waivers: Taking a dim view of debt waivers by the Centres and states, the survey points out that full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver, compared to the partial beneficiaries.
In addition, the debt waivers disrupt the credit culture and reduce formal credit flow to the very same farmers, thereby defeating the purpose.
The Economic Survey has suggested that 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. Eliminating such instances will enable competitive markets spurring investments and economic growth, it said.
