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straining rules and institutions we need
suitable mechanics of checks and bal-
ances, and of incentives and disincentives
at the points where markets meet the
institutions.
To empower markets, we have to grap-
ple with a range of forces on the supply
and demand sides. I give some examples
to provide an idea of the challenge.
Primary agricultural producers — of
cereals, pulses, oilseeds, vegetables,
fi sh, poultry, meat etc — face disproportionately
large buyers, do not have
access to information of other markets,
lack transport, storage and fi nance.
They are also harassed by local extortionists.
Rent seeking at government offi ces and
panchayats does not allow prices to
refl ect anything close to the cost of
production. Further, the problem is
caught in a vicious cycle, because rent
seeking can abate only when markets
take over in a true sense. The circularity
does not have an easy solution as
supervision at decentralised level is
enormously costly and corruptible.
Many industries are subject to extortion
along the entire supply chain from
raw material to the customer. Arbitrary
extortion at different stages of value
addition leads to distortion of relative
prices at these stages. Extortion is a law
and order problem only on the surface.
A nexus between extortion and politics
is clear in most cases.
Many markets are subject to avoidable
transaction costs. Some of them are
visible like multiple tax jurisdictions
and multiple and in-kind subsidies. But
there are many items that are not as
visible, e.g. costs incurred at the stages
of inspection, audit, certifi cation and
clearances.
In many cases markets are prevented
from becoming contestable by carteltype
accommodation or political favouritism.
Obstruction by incumbent
groups usually takes the form of collusion
on input, labour and product pricing.
Political favouritism occurs
through manipulation of tender practices,
bid rigging, deliberate delays,
infl uencing buyers and so on. Legal
action is not easy because of lack of
verifi able evidence and, often, offi cial
complicity.
Subsidy on purchases is widespread.
Some are provided on inputs, e.g. on
power, diesel, petrol, loans etc for farm
or industrial use. Others are plain consumption
subsidy e.g. on travel, accommodation
and other services for government
and public sector employees
and legislators. State governments
provide many additional forms of consumption
subsidies. Many are in kind
and hence highly distortionary.
T RANSFORMATIVE PLANNING
Type and quality of consumer goods
and services are dictated in many local
markets by non-market forces through
the guise of customs, culture and chauvinistic
ideology.
Producers are sometimes forced by
local politicians and musclemen to differentiate
between different parts of an
otherwise undifferentiated market.
Some parts of the markets get priority
supply and servicing. In products where
delivery or servicing takes time, it distorts
the functioning of the market. A
wide variety of markets face this sort of
distortion.
Apart from these, we have to grapple
with organised illegal transactions that
feed into other markets and undermine
effi ciency and fairness. Many of the problems
discussed here arise from unlawful
behaviour. But we cannot eliminate them
through the route of law enforcement
alone because of political connection and
corrupt enforcement machinery. To clean
up, we have to develop economic incentives
and employ technology and e-governance
measures that could lock at least
some illegitimate transactions.
Externalities,
Public Goods and Merit Goods
Even as markets are strengthened, important
markets will continue to fail because
of externality. Secondly, markets are not
able to supply the right amount of public
goods. Third, they produce merit goods
at prices unaffordable to many given today’s
income profi le. But public production
alone cannot settle these supply issues
satisfactorily as it leads to poor
quality, corruption, and indifferent or arrogant
behaviour. Both private and public
production have to be used in these areas
in an astute mix, and a variety of issues
THE INDIA ECONOMY REVIEW
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