Undergraduate Economist

Perspectives of an economics student

Prices, Competition and Markets

Posted by Alex M Thomas on March 31st, 2014

It has become commonplace in India to point fingers at the central government when prices of essential commodities such as onion or fuel rise. The underlying arguments behind this accusation could be that: (1) the government is expected to maintain price stability and/or (2) the government should socially engineer agricultural markets in a ‘fair’ manner. But, is the pursuit of price stability not the job of the Reserve Bank of India (RBI)? It is true that the RBI cannot do anything to combat inflation when it is caused by a supply-and-demand mismatch in the domestic vegetable market or the international oil market. What the RBI can do is manage inflation expectations, and that is for another post. The present post is motivated by the insightful analyses of Kannan Kasturi on the Indian vegetable market, published in the Economic & Political Weekly and other places. That is, this post takes up the second of the reasons mentioned earlier.

The price mechanism – adjustments made by producers to the selling prices and consumers to the purchasing prices – is expected to allocate the commodities brought to the market amongst the consumers, in accordance with their needs, reflected in their willingness to pay. The prices therefore act as signals for the producers especially. Sellers can adjust quantity in order to affect prices; hoarding commodities is one such strategy. At equilibrium, producers earn a normal rate of profit, which contains a pure rate of return on capital advanced and a return for risk and entrepreneurship. If producers do not make normal profits in time t, they will cut down production in time t+1. During the equilibration process, producers who are unable to earn a normal rate of profit will exit the market. If entry costs are low, new producers will enter the market. Producers who have large financial resources (or access to easy credit) at their disposal are insulated from temporary alterations in demand. Producers who have enough accumulated earnings can shield themselves from such market volatility. In short, a competitive market is one where prices are not distorted (by the producers or by external intervention), no (especially, cultural and social) barriers to enter the market exist and workers are mobile within and across markets.

Of course, the agricultural markets in India are far from competitive. Since more than 50% of Indians derive their income from agriculture, and particularly because of the poverty of the farmers, these markets require government intervention. This is not to say that any form of government intervention will better the situation. Kasturi quite convincingly shows that the fault lies with the supply-side – the agricultural supply chain. This post will not discuss minimum support prices or other input subsidies, such as for electricity, irrigation and fertilizers. Also to be noted is the specific manner in which the agricultural input markets are inter-linked in India, which has been of an exploitative nature. Finally, social and cultural factors (pertaining to caste and gender) are seen to hinder competitiveness in Indian markets, not just in agriculture.

What are the problems with the agricultural supply chain? Kasturi points out the following: (1) Small farmers lack storage facilities in order to gain from the high market prices. (2) The middlemen (those who intermediate between farmers and final consumers), i.e. the wholesale traders and commission agents have the ability to hoard vegetables and consequently they reap the benefits of the high prices they themselves engineer; the Agricultural Produce Marketing Act governs the agricultural markets (mandis) and it is here where all the proceeds from higher prices are absorbed with nothing reaching the farmers. These traders and commission agents are ‘well entrenched in the mandis, having been in the business on average for 20 years’ (3) Agricultural pricing is not at all transparent and the mandi records are of no assistance in this regard.

To sum up, the nature of government intervention has to change, in such a way that is beneficial to farmers. Proper laws are of utmost importance, not just in protecting the interests of the small farmers, but also that of the consumers.  Moreover, intermediaries in any market perform useful functions but laws should be in place which ensures that they do not become monopolistic and exploitative. Agricultural infrastructure such as storage facilities is paramount in this context. A very detailed study of how these supply-chains operate will be of much help in our attempts to combat inflation.

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Posted in Agricultural sector, Development Economics, Economics, Government, India, Inflation, Markets, Prices | No Comments »

2013: A Round-Up

Posted by Alex M Thomas on February 28th, 2014

January: Wages in Economic Theory and Reality: Some Issues

February: Reflections on Chayanov’s The Theory of Peasant Economy

March: The 2012-13 Economic Survey of India (with Raghuram Rajan)

April: On Economic Growth and Development

June: Thomas Tooke: An Introduction

July: Understanding India’s Economic Growth and Development [book review]

August: Misunderstanding Economic Growth and Development [book review]

September: Robert Torrens: An Introduction

October: Two Fundamental Objections to Marginalist Economics

November: Towards an Objective Understanding of Scarcity [book review]

December: A Review of Dipankar Gupta’s Revolution From Above: India’s Future and the Citizen Elite [book review]

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2012: A Round-Up

Posted by Alex M Thomas on January 28th, 2014

January: Alfred Marshall (1842 – 1924)

February: Is Marx (Ir)relevant?

March: Short Introductions to Keynes: Skidelsky vs Clarke [book review]

April: Malthus: The Scope of Political Economy

May: Kaushik Basu’s Economic Methodology and the Economic Survey of India 2011-12

June: Introductory Macroeconomics: On Crowding Out

August: Rosa Luxemburg: An Introduction

September: A Foreword to Keynes’s General Theory

November: The Character and Role of Economic Theory

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A Review of Dipankar Gupta’s Revolution From Above: India’s Future and the Citizen Elite

Posted by Alex M Thomas on December 28th, 2013

The year 2013 has seen a number of books on India by several intellectuals. Out of a total eleven chapters, Gupta devotes the first five and the last two in developing his thesis of the citizen elite. The four chapters in the middle deal with the economic contributions of the informal sector, universal health, universal education and the need to have planned urbanization respectively. Gupta’s central thesis is that India, and other democracies, require an ‘elite of calling to dig deep and bring out democracy’s many potentials’ (p. xi). This thesis is not well substantiated in the book and also is problematic in the working of a democracy.

First, we briefly engage with Gupta’s ‘citizen elite’. Their views, writes Gupta, may ‘appear utopian’ and they are willing to ‘forsake their immediate class interests’. Gupta’s causal story runs like this: citizen elites do not ‘maximize the given’, instead, it is their active interventions which render a country democratic. They have a ‘vision’ which goes beyond the short term (p. 37). Moreover, they are interested in furthering the society as a whole and not keen on specific interests – be it class, religion, caste or gender (p. 96ff). ‘Utopia is … about making a better future possible by deliberate interventions in democracy’ (p. 42). He considers them to be ‘leaders’ distinct from the voters. His summary of the first chapter on the first page reads: ‘democracy is meant to change reality and not submit to it. … Thus, while the general belief is that people make democracy, the fact is that a select few actually contribute much more’. Fraternity ‘is the single most important tenet of democracy’ (p. 4). ‘Real democrats are answering to a higher call, for they are fired by the ideal of citizenship whose core attribute is that of fraternity’ (p. 10). ‘Democracy is fragile and requires eternal vigilance’ (p. 10). ‘Democracy can be best understood as an art that has scientific possibilities’ (p. 11). The elites think in terms of ‘aspirations’ and how they can be met. He writes: ‘democracy needs leaders to show the way, even as it needs the people to evaluate them’ (p. 19). The elite, according to Gupta, are the ‘vanguards of democracy’ (p. 21). They are responsible for ‘establishing the foundations and principles of a democracy’ (p. 196). Moreover, ‘they force the state to deliver public services like health, education and energy, at quality levels, to every citizen regardless of class’ (p. 24). He places Lois Bonaparte, Otto von Bismarck and Mao Zedong under the group citizen elite; other citizen elites include Earl Grey (Factory Act in Britain), Robert Peel (who discontinued the Corn Law), Richard Cross (Public Health Bill) and Henry Brougham (Education Bill). They have a ‘calling’ and they ‘were answering to a higher voice’ (p. 26). Such claims as to their higher nature are difficult to justify and more so when Gupta denies any agency or role to working-class movements (p. 27). And Gupta concludes that the present ‘welfare state in Europe is an outcome of such elite interventions’ (p. 31). Gandhi and Nehru, according to Gupta, belong to this class of elite citizens. Despite finding Gupta’s thesis of a ‘revolution from above’ unconvincing, his observations about the current state of the Indian economy and society are astute. It to these observations we turn to below.

In India, 76 per cent of health costs are borne by individuals (p. 39, also p. 146). This is of concern in a country where only about 10 per cent people have some kind of health insurance (p. 146). Furthermore, only 35 per cent of Indians have access to essential drugs. India has only 0.9 hospital beds per 1000 population (p. 149). As for human capital, the Manpower Profile of India 2005 informs us that the skill level of the working class is low (p. 39). Only ‘5 per cent of the total workforce, in India has had the benefit of a vocational training’ (p. 123). Gupta favours ‘universal’ policies in health and education as opposed to the currently existing ‘targeted’ ones. As Gupta rightly notes, ‘[t]argeted policies make sense only when the population concerned in but a fragment of the total’ (p. 137). India spends less that 1 per cent of its GDP on health (p. 141), which Gupta finds ‘inexcusable’. The US spends about 6.8 per cent of its GDP on public health. Gupta reiterates that ‘[u]niversal health does not mean average health, or only health for the poor’ (p. 148). Similar to health, public investment in education is about 3 per cent of our GDP (p. 158). And, Gupta reminds us that ‘Sweden and Denmark allocate over 30 per cent of their GDP to public goods delivery’ (p. 163).

Gupta is disappointed that ‘India’s elite [of] today have committed themselves to commonplace economics and have no patience for the principles of the solar economy’ (p. 40). By commonplace economics, Gupta refers to ad-hoc policies which do not make fundamental improvements in the well-being of people. In contrast, the solar economy, refers ‘to a source of wealth creation that, like the sun, gave without thinking of what it could get in return’ (p. 38). This distinction is borrowed from Georges Bataille, a famous French intellectual and literary figure. Gupta further claims: ‘When the solar economy is in full force its glare makes us colour-blind, race-blind and ethnically blind’ (p. 41). It is not clear how to interpret the ‘solar economy’.

Gupta provides statistics which are indicative of the deep fissures characterising the Indian economy. 93 per cent of the Indian workforce is in the informal sector (p. 119). It contributed 59 per cent off India’s Net Domestic Product when India grew at about 9 per cent (p. 121). Moreover, the informal work in textiles, gems and jewellery, carpets contribute about 32 per cent of our export revenues (p. 121). ‘India’s growth story thus requires a full acknowledgement of the contributions of the small-scale sector and informal labour’ (p. 123). ‘Employing cheap labour is the Indian way of edging out international competition’ (p. 124). The IT sector employs less than 2 million people, contributes about 7 per cent to the GDP and approximately forms 25 per cent of our exports (p. 129). In 2009, 20.82 per cent of FDI went into real estate and construction and it withdrew itself from manufacturing and IT (p. 130). Gupta asks: ‘In 1990 there were 1825 strikes nationwide, but by 2006 the number had dwindled to 192. Why then should entrepreneurs fear strikes today? (p. 135). According to the 2011 census, the rural population in India is little above 69 per cent (p. 185). ‘[U]rbanization cannot be left to happen spontaneously and sporadically, but needs to be engineered keeping in mind the welfare of citizens’ (p. 165). The areas around the State capitals are growing – the Class-I cities such as Raipur, Nagpur, Surat, Pune, Aurangabad. Tirrupur accounts for 23 per cent of India’s garment exports (p. 171). And yes, we should be ‘paying greater attention to the quality of economic growth and not just to quantitative figures’ (p. 168). 45.5 per cent of rural NDP in India is non-agricultural (p. 169). 51 per cent of Mumbai’s population live in slums (p. 178) and the corresponding figure for Ludhiana, a manufacturing industry town, is 50 per cent (p. 183).

On public debt, Gupta is closer to the truth than many mainstream economists in India and across the world. He does not consider high public debt to be bad for the economy as long as investments rise and there is faster economic growth (p. 119). ‘The big paradox of India’s democracy is that free elections and mass hunger go side by side’ (p. 108). In addition, the existence of a ‘patron-client democracy’ implies the ‘lack of public support structures for citizens’ (p. 109). As Gupta rightly observes: ‘failing a proper universal delivery system, patrons are the best way out’ (p. 109) and thus reinforces the need for proper universal delivery systems.

To sum up, Gupta’s observations on the Indian economy are sharp and discerning. But, his thesis of the citizen elite suffers from too many pitfalls and so does his use of the ‘solar economy’ concept. Finally, it is strange that B. R Ambedkar gets only a passing mention (p. 4). Still, the middle four chapters of his book make a valuable addition to our understanding of contemporary India.

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Posted in Book reviews, Economic Growth, Economics, GDP, India | 1 Comment »