Three recent policy proposals illustrate this.
Traffic jam
Recently, Pramod Sawant announced – or rather reaffirmed – that app-based taxi services would not be allowed to operate in Goa. Anyone who has visited the state knows how awful the taxi service is. It is exorbitant in price and scarce in availability.
Incumbent taxi drivers have a vested interest in preserving the current system, as it allows them to earn abnormal profits. It’s a scenario reminiscent of licence raj: the state grants licences to a limited set of players, who then engage in rent-seeking to protect their outsized gains by restricting market entry. The consumer pays the price in terms of cost and quality. Competition would be a force for good – with more taxis (more investment), more drivers (more jobs), and affordable and reliable services for consumers.
Cool it off
Recently, the Union power ministry decreed that all ACs would only have temperature settings between 20° C and 28° C. The apparent logic of the move is to conserve energy – at temperatures lower than the prescribed minimum and higher than the prescribed maximum, energy consumption is significantly higher.
There is a functioning market for electricity with no apparent market failure. When people use ACs at low or high temperatures, they pay higher electricity bills. So, there is an incentive to run ACs in a reasonable temperature range. The only role for GoI is to make people aware of this. Then let prices determine demand.
The real challenge for energy conservation is the populist politics of subsidised power. This populism bankrupts state electricity boards, which are then unable to pay power generation companies. That, in turn, kills the incentive to invest in generating power, leading to a potential shortage in supply. It is this Achilles heel of the sector that needs addressing by applying more market forces, not fewer. Mandating AC temperatures reduces consumer choice and increases complexity and cost for manufacturers.
Number puzzle
Recently, a policy proposal was floated for inviting foreign investment to manufacture EVs. According to the proposal, if a foreign investor spent at least $500 mn in setting up manufacturing facilities in India, they would be allowed to import 8,000 cars a year worth more than $35,000 at a duty of 15% (as an exemption to the regular duty level of over 100%).
This ‘carrot’ was to be accompanied by a stick – a performance clause. If the investor failed to generate a level of revenue specified by GoI after specific years of operation, the latter would have the right to levy a penalty.
Again, prima facie, it seems a well-intentioned move to attract foreign investment while also protecting domestic manufacturers. But how does a bureaucrat decide that 8,000 is the appropriate number of cars to be imported at a reduced duty? Why not 9,000 or 7,000? Or that $35,000 is the right price cutoff?
A performance clause may make sense if GoI is giving a subsidy or explicit protection. But, in this case, they are only giving a small concession. Performance clauses should be applied to those getting 100% tariff protection. If GoI wants foreign investment in EVs, it should liberalise imports, and factor markets like land and labour. Consumers, too, will benefit from lower prices, raising demand.
The state must desist from unnecessary and complex interventions in the economy. If India is to fly, the state must transform from nanny (director) to handmaiden (facilitator).
