How the Indian government is turning private goods into public goods

A fab piece from Siddharth Singh of Mint.

He gives a superb perspective to this whole problem with governance in India. He says what is happening is this conversion of private goods into public goods space. This not just distorts markets but the whole policy space:

In the welter of data, one tendency can be discerned clearly. Since 2007, the ruling coalition in New Delhi has gone out of its way to turn private goods into public goods. That lies at the root of the macroeconomic imbalances seen today and likely to be witnessed in the years ahead. Classically, a private good—a loaf of bread is a good example—is something which its owner can exclude others from consuming. Food, petroleum products, employment and electricity are all in this class. A public good, in contrast, is one such that what one consumes does not lead to any decrease in anyone else’s consumption of it. Clean air, scenic beauty, national security, justice and equality of opportunity are public goods.

What all is being turned into public goods?

The United Progressive Alliance (UPA) has been busy these past years in changing—actually inverting—these definitions. It has turned “excludable” goods —i.e. when a person can’t consume a good unless he pays for it—into non-excludable ones. All by ensuring an identical, rock-bottom, price for everyone. That is the UPA’s innovation.

One-by-one, it has turned goods such as petrol (and diesel), electricity, employment (through the Mahatma Gandhi National Rural Employment Guarantee Scheme, or MGNREGS) and now food—quite possibly during this session of Parliament—into public goods. This has not only greatly distorted prices of various goods in India but, even more worryingly, is also mutating incentives out of shape. Correcting the latter, unlike correcting prices, is not a matter of tinkering with macroeconomic variables, but requires altering the fabric of society. This can’t be done by changing budgetary allocations or by changes in monetary policy. Once set, they can shave off growth substantially without anyone noticing it.

He points how NREGA and now the new food security bill (still to be passed) just create distorted incentives and shortage:

Employment is another good example. In the labour market, demand and supply conditions determine the wage level. If wages are low, it is not because employers derive pleasure in employing labour cheaply, but on the prevailing demand and supply conditions. Today, the bulk of the country’s unskilled labour force is eligible for a guaranteed 100 days work under MGNREGS. Such is the scale of this programme that it has led to labour shortage in an otherwise labour-surplus country. From construction to farming, rising input prices are translating into higher output prices. From food to finished houses, the secular rise in prices has a wage floor at their root.

Something similar has happened in the case of fuels as well. These goods are sold at ridiculously low prices that are identical for everyone—making them virtually non-excludable. This has bled state-owned oil companies almost to the point of ruin. This year, oil under-recoveries are going to touch Rs1.32 trillion. This story is repeated in many other sectors.

To provide public goods, one should provide ones with +ve externalities:

Instead of doing that, it would be much better for the country if it makes genuine attempts at providing true public goods—ones that have positive externalities. Two examples come to mind, education and infrastructure. It can do that, or it can continue with what it is doing . The latter course will be ruinous: for fiscal reasons today and by endangering future productivity by distorting incentives of a great mass of Indians.

Just to add on. How this shift to public goods then distorts the economy further. To even attempt these conversions you need a very strong fiscal balance sheet. But that has been poor for so many years now. End result is higher deficits and higher borrowing, Higher borrowing leads to higher interest rates on government bonds. As government bond yield curve is a kindf of public good on which other rates are based, all other interest rates also move up.  This leads to lower investment and consumption and inertia in private sector activity. So all is interlinked and connected…

Superb perspective getting to the core of basic economics.

6 Responses to “How the Indian government is turning private goods into public goods”

  1. crisismaven Says:

    I was not aware of the scale of Indian socialist policies in so recent years. What sounds like Chavez in an India that was just beginning to flourish and get to grips with its socialist history? What seemed in recent years to put India on an econimic groth path and “war footing” seems to have put it back on feet of clay. With peak oil looming these oil companies may never recover!

    • Amol Agrawal Says:

      Hi crisismaven,
      Well, Joan Robinson once said – “Everything and its opposite are likely to be true in India.” This must have been said some 50 years ago but is still so true. Basically no matter how much India progresses we will have policies which do not make any economic sense. Political economy of India is a subject which people do not understand and appreciate. It is highly complex and beats any economic logic..

  2. PB Says:

    It’s basically a massive transfer of wealth to the poorest. I think it has ensured less inequality than what would have happened with the fast economic growth that India saw. This transfer of wealth may also have a stabilizing effect on the country from a social point of view.

    The wealth transfer is happening from the middle class to the poor. That’s why we have seen the middle class complaining bitterly and participating in protests like the Anna Hazare movement. In contrast, my brief experience has made me believe that the poor are quite happy with how things are going.

    Investments in education will not bear fruit unless the poor actually have some wage security and believe in a future. I think such transfers of wealth will only strengthen the poor in what is an extremely poor country with a very very small middle class and tinier upper class.

  3. PB Says:

    Also, is the deficit situation in India as bad as in the West or Japan? Moreover, most of the deficit is financed internally. I can’t understand why a big deal is being made out about it.

  4. cheap international calls abroad Says:

    cheap international calls abroad…

    […]How the Indian government is turning private goods into public goods « Mostly Economics[…]…

  5. vallyettans Says:

    its just one sided coin and give the impression that government must be run on the basis of economic fundamentals rather than socialistic principles

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