TCS Daily

The Consumer as Sovereign

By Vijay Dandapani - March 11, 2004 12:00 AM

Among the many heartening changes that caught my attention during a recent trip home was the apparent sovereignty of the consumer. That aspect was underlined and, indeed, blown-up in billboards in virtually every Indian metropolis.

Not long ago, the dominant image in the urban heartland that virtually assaulted one's visual sense was the sight of mammoth cut-outs of grossly overweight politicians or film stars. Today, looking out of advertising boards is a breathtaking range of consumer offerings from cell phones to automobiles. Beyond the visual overhang, the dazzling array of options for consumers include scores of "consumer durables" such as washing machines, refrigerators and ceiling fans besides quotidian items such as Mustard oil, toothpaste, detergent and incense sticks. For devotees of the free-market, the change is like chicken-soup for the soul.

Nevertheless, the shadow of an entrenched bureaucracy is still fairly pervasive. Both local and central governments continue to adhere to the notion that consumers need "protection" from market forces -- often a thinly veiled reference to supposedly rapacious multi-nationals.

In that vein, the government of India still seeks to reserve over 675 items for exclusive manufacture in the small scale sector. The industry size limitation covers a mind-numbing array of items including food products such as pickles, chutney, pastry and even bread. It is hard to imagine that either Pathak or Bagatelle of the UK will embark on a roll-up strategy to buy every pickle and bread manufacturer, respectively, in India. The sorry regulatory strictures also run for numerous other goods such as pencils, cricket balls and radiator grills for cars besides, oddly enough, animal-drawn vehicles. If there is any doubt that the consumer is the loser as a consequence, consider the case of cricket balls. We inflict a variety of non-sports related pressures on our valiant eleven, however, locally made cricket balls is not one of them. While many Indian manufacturers have been in business for decades virtually none cuts the mustard for tests or one day internationals.

The Indian Institute of Entrepreneurship, a government run institute in Guwahati, has a blurb that courses its home page with the words "entrepreneurs are born as well as can be created." That byline sums up the mistaken ideology behind the risible efforts at "promoting" a business culture. That such an effort was untenable was noted some fifty years ago by free market gurus such as F.A. Hayek and Mises. Straining against the orthodoxy of their times, they argued that a central hand can never have all the information to plan the economic activities of people. There can be no greater boost for domestic manufacture than an effort to remove the leaden hand of government regulations and so-called promotions. The government's mistaken belief that some, if not all, economic activities should be sectored by industry size can only be dreamed up by all-knowing bureaucrats. That it essentially results in a tax to the very consumers they purport to shelter is a message that bears repetition, often.

In the area of pricing too, the government continues to lay its heavy hand on a range of items. Economics tells us that in a free-market pricing does two things. At one level it transmits information on what the market will bear and on the other it provides an incentive to produce the product in the most cost-effective way. Governmental interference in the process only serves to entrench vested interests that thrive in an environment that limits economic freedom. Price controls remain in critical areas like domestic gas causing international investors to remain leery of investments in India. Lifting price controls will, no doubt, result in an immediate increase in prices. However, in the long run with greater development, prices will most certainly trend downwards as a consequence of greater supply. In the case of the small scale sector as well, the government in a well-intentioned but misguided move offers as much as a 15% price-preference over similar products from the large scale sector. The inherently insidious effect may not be immediately apparent but with a virtually permanent subsidy, the entrepreneur in the small scale sector has little incentive to move on to being a large scale manufacturer.

While the country's ride into free markets seems an unstoppable train there are considerable gains to be had from an effective dissemination of the idea that what India needs from its government is oversight through the rule of law and not control and planning. The government almost knowingly promotes cartels in regulating who can and cannot produce goods or services in predetermined quantities and/or prices. That unfortunately results in the consumer ending up as a pauper rather than a sovereign.

The author recently wrote for TCS about The Best Contraceptive.


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