Time to set price distortions right 

Context: Since 1991, India has undergone economic liberalisation, openness to international trade and investment, resulting into an open free market economy in India. The government’s major priority since then has always been to improve the ease of doing business.

However, it has failed to improve the cost of doing business, which been very high due to the government policy-induced pricing distortions.  

Some Cases of Pricing distortion in India 

Petrol and diesel pricing distortion: Earlier, the diesel was subsidized. Therefore, diesel car’s demand surged. Later, the government removed diesel subsidy. Now, it is levying high taxes on fuels to raise revenues to moderate the fiscal impact from COVID. This has given an inflationary impetus.  

Electricity pricing distortion: A cess of ₹400 per tonne is levied on coal. Earlier, it was levied to generate resources for promotion of renewable energy and decarbonisation of the economy. Now it is used to meet shortfalls in tax receipts. 

In Indian railways, there’s a cross subsidisation of passenger and freight fare. The high freight fare increases transportation cost of commodities. For example, transportation cost of coal becomes high. It also distorts the pricing of electricity for the distribution companies. It leads to loss of competitiveness, lower manufacturing growth and the creation of fewer jobs in India.  

In India, it is difficult to get land for business enterprises. The land prices are distorted due to a real estate asset price bubble. 

What factors have led to government policy induced pricing distortions? 

One factor is the political need to find a way out for a cash-strapped government to raise resources, OR  

To provide affordable goods and services to those in need. It is provided through a cross subsidy within the sector.  

Why are the pricing distortions dangerous for the Indian economy? 

These pricing distortions lead to competitive disadvantage to domestic value addition and job creation in an open economy.

– For example, energy is the basic requirement of the modern industrial economy. But energy prices distortion reduces competitiveness in the market. 

It has led to India’s relative lack of success in manufacturing and employment generation. 

Ways Forward 

There is a need for political leadership and investment of political capital in generating a consensus and steering change in addressing pricing distortions. 

Petrol and diesel should be brought into the ambit of GST. For instance, If the highest rate of 28% is levied on petrol. The pricing of petrol would be around ₹60 per litre.  

Land use conversion and redevelopment processes need to be made user-friendly. 

There is a need to improve public provision and upgradation of quality infrastructure. It would reduce supply side constraints and lower prices in real terms. 

There is a requirement of reducing the cost of doing business. In addition, private investment needs to be promoted. It will create better jobs. 

Source: The post is based on an article “Time to set price distortions right” published in The Hindu on 20th April 2022.