The Economic Survey at the very onset says that while there is a case for Government intervention when markets do not function properly, excessive intervention especially when the market can do the job of enhancing citizens welfare perfectly well, stifles economic freedom and creates ‘deadweight loss’ which is the loss created by the wasted chance of creating a consumer and producer surplus and reduces wealth creation by not allowing efficient allocation of entrepreneurial resources and energy to productive activities thereby promoting economic dynamism. The Union Minister for Finance and Corporate Affairs Smt Nirmala Sitharaman tabled the Economic Survey 2019-20 in Parliament today.

Essential Commodities Act, 1955

The Survey describes inter alia, the Essential Commodities Act (ECA) as anachronistic and irrelevant in today’s India as the Act was passed in 1955 in an India worried about famines and shortages. The Survey observes the frequent and unpredictable imposition of blanket stock limits on commodities under the ECA distorts the incentives for creation of storage infrastructure by the private sector, movement up the agricultural value chain and development of a national market for agricultural commodities. The Survey further notes that imposition of stock limits on Dal, Sugar and Onions had no effect on the volatility of retail and wholesale prices The Survey, providing clear evidence, suggests that the Act must be jettisoned in order to grant more economic freedom to the market and to facilitate the process of wealth creation in the economy. The Survey further says that the ECA only seems to enable rent seeking and harassment.

Making Drugs Affordable

Given the important task of ensuring access to essential life saving drugs and to avoid poor households from falling into poverty, Government often has to resort to controlling prices of drugs under Section 3 of the Essential Commodities Act.  The Survey expresses concerns over the regulation of drug prices through the National Pharmaceutical Pricing Authority (NPPA) and Drug Price Control Order (DPCO) as it often leads to an increase in the prices of the regulated drug vis-a-vis that of a similar unregulated drug which is counter-productive and leads to a sub-optimal outcome. The Survey further explains how the increase in prices of drugs is greater for expensive formulations than for cheaper ones and also greater for those sold in hospitals rather than retail shops thereby making DPCO counter-productive to its objective of making drugs affordable.

The Survey suggests that as Government is a huge buyer of drugs through its various arms such as CGHS, Defense, Railways etc., it can intervene more effectively to provide affordable drugs by combining all its purchases and thereby exercise bargaining power. The Survey advises Ministry of Health and Family Welfare and its related arms to imbibe the evidence to evolve non-distortionary mechanisms that utilises Government’s bargaining power in a market oriented transparent manner. The Surveys says that the Act interferes with the market functioning and provides incentives that are detrimental to wealth creation thereby adversely affecting both social welfare and economic development.

Rationalisation of Food Subsidies

The Survey observes that Government policies in the foodgrain markets have led to the emergence of Government as the largest procurer and hoarder of rice and wheat which has led to burgeoning food subsidy burden and inefficiencies in the markets affecting the long run growth of agricultural sector and adversely affecting competition in these markets. This has led to overflowing of buffer stocks with FCI, burgeoning food subsidy burden, divergence between demand and supply of cereals and acted as a disincentive towards crop diversification. The Survey suggests foodgrains policy needs to be dynamic and allow switching from physical handling and distribution of foodgrains to cash transfers/food coupons/smart cards.

Debt Waivers Disrupt Credit Culture

According to the survey, an analysis of the debt waivers given by States/Centre shows that full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver when compared to the partial beneficiaries. Debt waivers disrupt the credit culture and end up reducing the formal credit flow to the very same farmers, thereby defeating the very purpose of the debt waiver provided to farmers. The share of formal credit decreases for full beneficiaries when compared to partial beneficiaries, thereby defeating the very purpose of the debt waiver provided to farmers.

The Survey makes the case that the Government must systematically examine areas where it needlessly intervenes and undermines markets. Eliminating such instances will enable competitive markets and thereby spur investments and economic growth.

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RM/SC/AS

Essential Commodities Act reform urged to restore market incentives and support wealth creation through reduced intervention. The Economic Survey argues that excessive market intervention creates deadweight loss and misallocates resources. It calls for reforming or jettisoning the Essential Commodities Act because stock limits distort storage incentives, enable rent seeking and fail to stabilise prices; recommends replacing price controls in pharmaceuticals with aggregated government procurement and market oriented bargaining; urges shifting foodgrain policy from physical distribution to targeted cash transfers; and warns that debt waivers disrupt credit culture and reduce formal credit flows.