It is strange how even intelligent politicians fail to understand the harm they do with their interventionist urges, and how clumsy attempts to fiddle with markets are counter-productive -- and especially harmful to a cause dear to our politicians' heart, namely public sector companies. Two recent examples will make the point clear.
The financial results of the three big state-owned oil-marketing firms show a combined loss of about Rs 2,700 crore (Rs 27 billion) for the first quarter of the financial year -- or a daily loss of about Rs 30 crore (Rs 300 million). At that rate, all three could be on their way to industrial sickness in about two years. In other words, some of the strongest and most profitable companies in the country, including one that finds mention in the Fortune 500, are being hobbled.
There are two ways to veer off from this disastrous course: one is to raise petroleum product prices for the end-consumer, in keeping with the higher prices that the oil-marketing companies are paying for their crude oil, and the second is to fund the companies out of the Budget. The first seems politically impossible, given how much difficulty the government had in announcing very modest price increases a couple of months ago. The second will destroy all attempts at fiscal restraint. Either way, the government and the public sector are the victims.
This is the direct consequence of first Ram Naik and then Mani Shankar Aiyar deciding as petroleum ministers that the government, and not the market, should dictate petro-product prices -- and thus bringing politics into the picture. Murli Deora, their more private sector-oriented successor, has simply stayed the course on what is now the path of least resistance. The objectives were eminently worthwhile: control inflation, spare consumers but as they say, the road to hell is paved with good intentions. Mr Aiyar in particular was keen to strengthen the public sector companies controlled by his ministry. He may find instead that he has worked towards destroying most of them.
What has been done to the state-owned oil-marketing companies may now be done to the public sector banks. Mr Chidambaram, blessed with an intellect that is if anything even more formidable than Mr Aiyar's, has decided to intervene in the market for money. He has chosen to order the banks owned by the government (and one owned by the Reserve Bank) to keep their recent interest rate hikes in abeyance, and to take the matter to their respective boards --on which finance ministry representatives sit. It is not hard to guess what timid bank managements, who know the finance minister's mind, will now do. Two defences have been offered: one explicitly, that the government owns the banks and is therefore within its rights to tell them how they should be run; and the other indirectly, that low interest rates are good for the economy.
Talk of what good intentions end up doing. For, the result (other than having an RBI governor sitting in his ivory tower in downtown Mumbai and wondering about his role in the system) will be to make the public sector banks uncompetitive in a market that is witnessing a steady increase in interest rates. Bank stocks have already fallen on the stock market, and deposits should be expected to flow to the banks that offer better interest rates (i.e. the private sector competition). Public sector bank managers may chafe at the bit, but none of them wants a run-in with Mr Chidambaram, who, like Mr Aiyar, is not shy about speaking his mind.
Such examples can be multiplied: Ram Vilas Paswan, for instance, wants to quadruple the number of drugs under government price control. And Sharad Pawar still decides how much sugar should be released into the market every month. What this tells us is that India's politicians have not cared to understand the logic of markets, and retain an infinite faith in their own ability to play optimally with multiple objectives, and to do so through old-fashioned executive fiat rather than market-signalling systems.
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