Back to the future

Commerce Minister Kamal Nath is a man to admire as he sees no contradiction in exhorting industry to achieve higher and higher export growth targets and, at the same time, threatening to cut off its ability to export if domestic prices rise beyond his liking. Mr Nath’s target of attack is the cement industry and rising domestic prices. The industry’s argument, which is valid, is that price rises are taking place in many sectors, from aluminium to steel, copper to iron ore, and sugar to pulses, so why doesn’t the minister focus on them as well?

While Mr Nath has mercifully not done that, his intervention on cement is not an isolated instance; too many ministers in the UPA government are still caught in the mindset where they think they can and should impose price controls when they see trends of which they disapprove. So, Chemicals Minister Ramvilas Paswan has been threatening to increase the number of medicines covered by the Drug Price Control Order (DPCO), quite unmindful of the fact that while the supply of DPCO drugs has grown only marginally over the past decade, the supply of non-DPCO or free market drugs has grown dramatically—proving the old point that price controls are ultimately counter-productive for the consumer. Communications Minister Dayanidhi Maran, similarly, has worked with single-minded devotion over the past several months to get companies to usher in a flat one-rupee tariff across the country—though this is territory that comes under the purview of an autonomous telecom regulator. The human resource development minister, like his predecessor, concerns himself with the fee structure of educational institutes and not with increasing the number of such institutes. Even the finance minister concerns himself with the price of credit and informally directs public sector banks not to increase interest rates. That all this should be happening under the prime ministership of a man who made his mark by freeing the economy from precisely this kind of counter-productive micro-management is a special irony.

Two points need to be made. First, cement prices are responding to demand-supply shifts; for long years, cement prices ruled at levels that producers considered unremunerative, so that fresh investment in capacity did not take place. Demand has now caught up, just when the economy is into the investment phase of the business cycle and construction activity has picked up momentum; the result is that prices have moved up fairly dramatically. All that this means is that fresh investment in capacity will take place, and prices will then drop. None of this therefore warrants ministerial intervention.

The second point is that, given Mr Nath’s charge of exports, he should understand that exports cannot be stopped each time domestic prices rise, or producers will never be able to build a customer base overseas. Agriculture has been a victim of precisely such maladroit action by the government. Whenever there has been a rise in domestic prices, such as during the infamous “onion crisis” in the late 1990s, exports were cut back. It might be argued that onion prices are politically sensitive, but that cannot be said of cement. If Mr Nath would let things alone, the market will revert to equilibrium before long.