A variety of price-control measures have been implemented. These controls are both indirect and direct in nature.
Indirect Control
Indirect controls are primarily implemented through monetary, fiscal, and commercial (foreign trade) policies. Monetary policy refers to the Central Bank of the country’s policy regarding the cost and availability of credit. The rationale for using monetary policy to control prices is that the money supply and prices have a very strong direct relationship. In general, an increase in the money supply leads to an increase in prices, and vice versa. As a result, monetary contraction is used to try to stop price increases, while monetary expansion is used to deal with price falls.
The Reserve Bank of India (RBI) has used the Bank (Discount) Rate Policy, Open Market Operations, Variable Reserve Ratio Requirements, and various Selective (Qualitative) Credit Control Methods. (For more information, see the chapter on Monetary and Fiscal Policies). Fiscal policy should be implemented in tandem with monetary policy in order to be effective. Fiscal policy refers to the government’s approach to public revenue and expenditure. Fiscal policy can influence the price level by increasing or decreasing the public’s purchasing power. It can also influence prices by imposing, removing, or varying taxes on commodities or services, as well as through subsidies. Taxes such as excise duties, sales taxes, and customs duties can have a significant impact on commodity prices.
To some extent, commercial policy has also been used to stabilize the domestic economy. Prices can be kept under control by increasing supply by importing in-demand goods. This has been done with commodities such as edible oils. Furthermore, the government prohibits the export of certain items whose supply position is unsatisfactory in the economy.
To avoid an unjustified drop in prices, the government may occasionally resort to the deliberate export of certain items. Other measures, such as buffer stock operations, can also help to avoid large price fluctuations.
In India, the Central and State Governments have armed themselves with a slew of Acts to exert direct control over the economy’s operations. Laws such as the Industries (Development and Regulation) Act, the Essential Commodities Act, the MRTP Act (now the Competition Act), the Foreign Trade Development and Regulation Act [earlier the Imports and Exports (Control) Act], and others give the Central Government broad authority over production, supply, distribution, and price.
Administered Prices: Lord Keynes’ term “administered price” refers to a price that is consciously set by a single decision-making body—such as a monopoly firm, a cartel, or a government agency—rather than being determined by free play or market forces. However, the term “administrated price” is frequently used to refer to the government-determined price. When supply and demand are free to interact in the market, the price of a product rises when supply falls short of demand and falls when supply exceeds demand. However, because the price is fixed at a specific level in the administered price system, fluctuations in demand and supply do not cause price fluctuations. In other words, the administered price does not correspond to an equilibrium price. Furthermore, the administered price may not reflect current demand and supply conditions; in some cases, it may not even absorb the entire cost of production.
The government in India controlled the price of a number of key commodities. Steel, coal, fertilizers, aluminum, and electricity are among the key commodities and services whose prices were administered, accounting for roughly one-fifth of the total weight in the wholesale price index. Thus, in the past, the administered price was a significant factor influencing India’s overall price level. Previously, more than 70% of goods and services sold by public sector enterprises were subject to administered prices. This demonstrates the significance of the administered price in the Indian economy.
Administered prices were generally set based on the recommendations of an expert body, such as the Bureau of Industrial Costs and Prices (BICP), or, in the case of certain public enterprises, on the recommendations of specially formed Inter-ministerial Committees or Groups. The BICP was eventually replaced by the Tariff Commission. When recommending prices, the recommendatory body normally follows the government’s price-fixation guidelines and, among other things, takes into account the cost of the most efficient firms, which account for a large percentage of total output (to ensure a certain level of efficiency in production), the optimal norms of raw material and energy consumption, as well as capacity utilization, and provides a fair rate of return, which has generally ranged between 10 and 14 percent on net worth.
To reconcile the interests of consumers and producers, a system of retention prices for different producers based on cost of production on the one hand and uniform sale prices for consumers on the other had been recommended and had been implemented in several cases such as steel, fertilizers, cement, and so on. Price adjustments have been allowed for changes in major cost components from time to time, and a thorough review is conducted at appropriate intervals.
The principle of fair return also applies to public enterprises. However, because these businesses are generally involved in the provision of infrastructure services or the manufacture and supply of basic industrial materials such as coal, steel, and POL, or agricultural inputs such as fertilizers, price increases have a cascading effect. As a result, an attempt was made to keep their prices low. This, along with managerial shortcomings and other factors, had resulted in insufficient resource generation by public enterprises, losses in some of them, and a heavy draft on the public exchequer. It also meant the supply of goods and services produced in the public sector at subsidized prices even for non-priority uses, which accentuated demand-supply imbalances. As a result, there was a growing realization that, in the context of ongoing inflationary pressures at home and abroad, administered prices should not be kept out of step with other prices without incurring significant economic costs to the country.
The primary goal of the administered price system is to safeguard the interests of both producers and consumers. However, in India, the system has frequently failed to protect the interests of both the producer and the consumer. Price controls slowed the growth of the affected industries and exacerbated market imperfections, resulting in ongoing commodity shortages and thriving black markets.
Dual Pricing: Sugar, cotton textiles, paper, and aluminum were previously subject to dual pricing in India. The dual pricing system was designed to allow the weaker sections of the population or privileged buyers such as the government to obtain the commodity at a lower price. Under dual pricing, the government may acquire a portion of an industry’s output at a price fixed by it, which is usually lower than the market price, and the remainder of the output may be sold by the industry at the market price. For example, under the dual pricing policy for sugar, a portion of total sugar production was to be sold to the government as a levy at a government-determined price. The remaining non-levy sugar was allowed to be sold at the free market price. The levy price was sometimes three times the free market price.
Our country’s dual pricing system has been heavily criticized. Such controls, it was argued, had an impact on capital formation and production in such industries. It is claimed that the dual pricing system does not always allow the industry to make up for levy sales losses through free market sales. Another point of contention is that the system encourages fraud, black marketing, tax evasion, corruption, and the creation of black money.
Subsidization: Subsidization policy has a direct impact on the prices of certain commodities. Food grains, fertilizers, and controlled cloth were important commodities whose prices were deliberately kept low by government subsidies. Subsidies were also provided for certain export goods.
Subsidies’ primary goal is to protect vulnerable groups and priority industries. Food grains, for example, are subsidized to increase consumption among the most vulnerable groups. Certain export goods were subsidized in order to increase their price competitiveness in the international market and thus our foreign exchange earnings.
The sharp increase in the exchequer’s outflow from subsidies has given rise to calls for their reduction, and in some cases, abolition. Subsidies, as they currently exist, cannot be justified on the basis of economic equity and social justice, according to two main arguments for their reduction/abolition. Subsidies eat into development resources, and subsidies, as they currently exist, cannot be justified on the basis of economic equity and social justice.
The Essential Commodities Act
The main purpose of the Essential Commodities Act of 1955 was to provide for the control of the production, supply, and distribution of, as well as trade and commerce in, certain commodities in the public interest. A number of commodities have been designated as essential by the government. For the purposes of this Act, the Central Government may declare any class of commodity to be an essential commodity by notified order.
This Act empowers the Central Government to regulate or prohibit the production, supply, and distribution of any essential commodity, as well as trade and commerce in that commodity, for any of the following purposes.
- Keeping or increasing their stock.
- Equitable distribution and availability of the commodities at reasonable prices.
- Obtaining any essential commodity for India’s defense or the efficient conduct of military operations.
If a company commits an offense under this Act and it is proven that the offense was committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary, or other officers of the company, such director, manager, secretary, or other officers shall also be deemed guilty of that offense and shall be liable to be prosecuted and punished accordingly.
Under this Act, state governments have issued a large number of orders restricting the free movement of certain food grains and other agricultural products. In the Budget Speech for 2001-02, the Union Finance Minister stated that in the changed situation, this is undesirable and the Act, and thus, the Government proposed to review the operation of this Act and remove many of the restrictions on free inter-state movement of food grains and other agricultural products, as well as to reduce the list of essential commodities to the bare minimum required.