Sunday, January 13, 2013

Economic Freedom: A Myth?

GOVERNMENT INTERVENTION in areas where it sounds absolutely ridiculous is still the major hurdle a businessman or a farmer faces in carrying out his activity in India, if the Economic Freedom Report 2012 is to be believed.

The study carried out involving distinguished economists from India and prepared by Friedrich-Naumann Stiftung says though "India’s economic freedom rating has improved notably since the early 1990s, it is still low and it ranks poorly on a global scale (111th  place out of 144 countries)."
Ashok Gulati, Chairman of the Commission for Agricultural Costs and Prices, Union Government, says agriculture is still a sector that has the most stifling controls, especially on marketing its produce.
It should be noted that agriculture is the largest private sector enterprise in India employing half of the workforce in the country and contributing 14 per cent to the Gross Domestic Product (GDP).

The country is yet to give female farm workers equal status. They are not even considered farmers.
Gulati has carried out research on sugar and paddy -- the predominant agriculture crops -- besides fruits and vegetables, and the findings are startling.

"An official in the Directorate of Sugar (Government of India) decides how much sugar each of the 550-plus sugar mills in the country can sell as 'non-levy quota' in the free market each month.

"Then another official decides how much of the government’s annual 'export quota' should be allotted to each sugar mill, and how much they can export each month (whether or not they have the international competitiveness or motivation to export)," says Gulati.
It is the government that decides whether the sugar should be packed in polypropylene bags or jute bags!
Once sugarcane reaches the mills, the mill owner cannot decide whether she should produce molasses or ethanol as a byproduct while making sugar, the government decides.
Even if she produce what the government asks her to, she cannot fix its price, again the government does it.
And adding to her woes, she is not supposed to freely move the produce from one state to other.
Various state governments fix the quota for liquor or chemical industries that uses molasses or ethanol.
This cobweb of regulations naturally leads to strangulating sugarcane production though the revenue generation potential of this crop is astoundingly high -- sugar, molasses, ethanol, liquor, chemicals, and even electricity.
"When the marketing and pricing of sugar as well as allied products is subject to government controls (which are sometimes light-years from market rationality), the potential of developing sugarcane is affected," says Gulati.
Sugarcane farmer too is not without strangleholds. Sugar factories pay the price of cane to farmers, which again is fixed by the Union Government and many a time it is overruled by political decisions of various states.
"Political overdose" in pricing results in non payment of prices (in April 2012, the cumulative payment arrears were estimated at Rs 10,000 crore) and court cases drag on for years.
The story is almost similar or worse regarding  paddy cultivation.
Right from its production to marketing, the government intervenes in multitude forms which is neither helpful to the farmer nor the agriculture sector.
Again price is fixed by government, there is no place to store huge quantity of paddy for the farmer to sell at the 'right time.'
Even if the paddy reaches mills for rice extraction, mill owners cannot sell it according to market conditions. They have to sell a certain percentage to the government at a price -- called levy price --fixed by it.  
This rice reaches the Public Distribution System and some states sell it for as low as Re. 1 a kg (politics at work again).
Interestingly, the same rice can be re-routed to government during the next harvest for a higher price!
And the vicious circle continues and there is a ban on export too.

"India needs a unified national market, with rice flowing seamlessly across state borders. Instead we have a highly fragmented rice market, leading to large inefficiencies in production, procurement, stocking and distribution," says Gulati.
Fruits and vegetables
A sector which consistently sees a growth in demand too in the grips of government control.
'Grow but don't sell' seems to be the government policy.
In most states, a farmer is forced to sell his crop through vegetable markets set up under the Agricultural Produce Marketing Committe Act.
And the agents (appointed under the Act) at these mandis charge anywhere between 6 per cent to 15 per cent towards commission.
Most of the time, auction is just a ritual that goes against the farmer.
It is a classic example of farmer takes the risk, agents pocket the profit.
"This makes India’s supply chains expensive with several layers of middlemen, gives lower prices to producers, yet charges high prices to consumers. This is neither efficient nor equitable. The system needs to be changed drastically. But this is resisted by the traders and middlemen, who are politically powerful," says Gulati.
For  a vibrant agriculture sector, Gulati suggests four measures:
1. Free agriculture from domestic controls
2. End physical ban on exports of agriculture produce 
3. Free crops like fruits and vegetables from marketing controls
4. Free land lease markets from official clutches.

The study by Bibek Debroy, Centre for Policy Research, points out to the "labour aristocracy of unionized workers who are highly paid and highly protected," and the plight of massive workers in the unorganised sector coupled with a corrupt Inspector Raj that makes a person carry out business activity nearly impossible.  
In some of the areas, the government intervenes in a comic way.
For example, the Factories Act says that "the State Government may prescribe the number of latrines and urinals to be provided in any factory" and "may make rules prescribing the number of spittoons to be provided and their location in any factory."
There are  ridiculous rules regarding where a factory worker should keep his cloth or  how to dry them if it gets wet!
"They often prescribe practices that were common a century ago, and ignore new realities brought by electricity or computers. For instance, some rules say that factories must be whitewashed (painted with white lime). Apparently plastic paint won’t do. The Rules say earthen pots filled with water are required. Apparently mechanized water coolers won’t suffice. Red-painted buckets filled with sand are required by the Rules. Fire extinguishers won’t do. There must be creches (day-care centres for  children) within the factory. Making transport arrangements for accessing creches outside the factory won’t be enough," says Debroy.
There are rules regarding holidays, working hours for women, maintenance of records, minimum wages, and number of workers, that give Inspectors enormous powers which in turn pave way for massive corruption.
Even in the 21st century, manual documentation is mandatory -- electronic documentation not allowed.
Since almost all the political parties have a labour wing, major reforms in this sector, especially those relating to retrenchment, layoffs, and closure of factories, will take time, at least obsolete clauses (like mandating manual registers instead of electronic), laws relating to the inspector raj, laws limiting shop hours, laws limiting female participation at night, should be abolished immediately, the study says.

No comments :