In public policy discussions, often the debate centres on the question: Would the proposed policy change benefit the nation?
But a nation consists of millions of people. Almost always, any new policy would benefit some while hurting others. For example, if farm prices go up, farmers gain but the consumers lose. With lower import duties, domestic prices of imported products fall which hurts the domestic producers of import substitutes benefits domestic consumers of such products while the government loses the tax revenue.
In such cases, economists would typically check whether the gains of the gainers would be more than the loss of the losers. If yes, then in economists’ calculation, the policy is in overall national interest.
However, there are several problems with this approach. First, the identification of gainers and losers. Taking the example of raising MSP, all farmers do not necessarily benefit. At present, only about 6% of farmers are able to get MSP, the rest are forced to sell their produce to local agents at prices far below MSP, either because the APMC mandis are far away or artificial hurdles are created by middlemen to prevent farmers from getting access to such mandis.
Marginal farmers who are net buyers of foodgrains actually lose when MSP is hiked. So, the major gainers are the bigger farmers (concentrated in a few states like Punjab, Haryana, Karnataka) having access to APMC mandis while the clear losers are the net buyers of the products and the government which has to first subsidise the producers and then the consumers.
The gains to small farmers are much less. Similarly, if the import duty on, say, steel is hiked, the domestic producers of steel (like Tata Steel) benefit while the users of steel as an input (like Tata Motors, LG) would lose. That is why liberalisation of imports is supported by some industrialists while opposed by others. There is no doubt that apart from having lower prices after import liberalisation, consumers have gained as a result of greater product variety and better quality due to competition from imported products.
Second, how to measure the gains and losses in monetary terms? We need to have reliable data on the consequent changes in prices and quantities of outputs and inputs (ex-post) which are not easily available or estimable (ex-ante). The gains from increased product variety and quality improvements over time are even harder to measure.
Third, there are non-market consequences like environmental damages as a result of more land getting diverted to water-intensive crops like rice and sugar cane (that get the benefit of MSP) which, along with subsidised electricity to run pumps, is lowering the water table to dangerous levels. Such environmental losses are far more difficult to quantify in money terms.
Fourth, should we simply assume that a rupee is a rupee, irrespective of who (a billionaire or a destitute) gets or loses it? Or, should we assign different social weights (which would reflect our subjective value judgement) to gains and losses accruing to different sections like poor vs rich or private sector vs government while aggregating the monetary gains and losses to arrive at an estimate of net national gain?
If yes, then a policy which mostly benefits relatively affluent people while hurting the relatively poor may not be in national interest even if the (unweighted) monetary gains of the ‘rich’ are more than the losses of the ‘poor’.
Changing views
Fifth, even when the gains of gainers are more than the loss of losers, it does not mean that everyone actually benefits. It only implies that, potentially, everyone can be made better off by suitably taxing the gainers and transferring the proceeds to the losers. But, unless that kind of redistribution is actually carried out (which may not be politically feasible), some people would end up being losers. In that case, the losers would continue to oppose the policy even though it is supposed to be in overall ‘national interest’.
The views of losers may also change over time. For example, Rahul Bajaj of Bajaj Scooters (forming the so-called ‘Bombay Club’) was once a major opponent of import liberalisation as they feared to lose from stiffer competition from Hero-Honda. But after Bajaj arranged a foreign collaboration with Kawasaki to form Kawasaki-Bajaj, the views of Bajaj changed.
In other words, the initial losers from a policy may, over time, learn to cope with the new reality and make use of the opportunities opened up by the new policy. That is why sometimes an ‘unpopular’ policy needs to be pushed by the policymakers which may find greater acceptability as time passes.
Sixth, the timing and the speed of implementation of a new policy does matter. The economic liberalisation of 1991 was reluctantly accepted by many people as India was facing an unprecedented economic crisis when it was forced to borrow from IMF (and accept the IMF-World bank ‘stabilisation-cum-structural adjustment’ package) to pay for essential imports.
Similarly, a policy of import liberalisation with gradual lowering of tariffs on industrial products over time (not a ‘big bang’ approach), while maintaining high tariffs on ‘sensitive’ agricultural goods (where domestic production is carried out mostly by millions of small poor farmers) helped its political acceptance. A new policy, which is feared to cause loss of jobs and incomes for some people even when it is in overall ‘national interest’, is far more difficult to implement in an atmosphere of general economic recession, as opposed to a situation of high growth of GDP.
Finally, it is a sad fact of democracy that ‘reformist’ policies supported in ‘national interest’ by political parties forming government are invariably opposed by the same entities when sitting on the other side of the aisle.
(The writer is former Professor of Economics, IIM Calcutta, and Cornell University, USA)