Friday, June 6, 2008

Politicizing markets: the India example

India is facing rising crude oil costs like other nations, but very differently. Indeed, the retail price of gas is set by the government, and as this price has been adjusted only once in 20 months, refineries that have to pay the market costs for their input face big losses. And the fact that the government is postponing meetings to solve the issue makes the problem just worse and worse. The longer it waits, the more brutal the price increase will be, and the more people will revolt. Because there, people have a reason to blame the government for price changes as the latter sets them...

Politicizing an economy is always a bad idea, and India is a prime example in this respect. For example, lobbies have been successful in enforcing protection for small manufacturers by preventing big plants to establish. This has especially hurt India in the textile sector, for which it is perfectly suited but has abandoned the world market to others to preserve inefficient mom and pop operations. By some accounts, the Indian GDP could be close to tripled by simply removing this kind of government meddling. Since this account, the Indian government has taken this seriously, deregulating substantially, leading to growth rates similar to China. But the new government ruled by the Congress Party does not seem eager to pursue this policy at all, unfortunately.

2 comments:

Independent Accountant said...

I have been following India since the 1991 liberalization. I would not be surprised to see India's per capita GDP double in five years if it followed your suggestion. Among things it should get rid of is its "job reservation" system for the "backward" castes.

Vilfredo said...

The same could be said about much of Africa, where the solution to its ills seems to be more government control over markets. Zimbabwe is the extreme case, but many others show shades of this.