Friday, October 05, 2007

Dreaming about a free market fundamentalist majority in India

Did you know that a recent survey found that "in urban India, ... 89% are supportive of international trade, 73% are supportive of foreign companies and 75% are supportive of free markets" ? These figures lead Nitin to conclude:

... At least 7 in 10 Indians you’d meet in cities, it turns out, are free market fundamentalists.

Not so fast, Nitin! Here's a tiny byte (aka a bit) of reality for you: In the last decade, there have been several occasions when the Indian government tried to 'free' the price of LPG aka cooking gas. The arguments against gas subsidies are so solid that letting LPG price 'float' to its 'market-clearing price' is unquestionably the right policy -- at least according to economists and government officials. Even at the market price, LPG would continue to be affordable to the middle class, which presumably forms the bulk of the "7 out of 10 Indians ... [who] are free market fundamentalists". Now, just ask yourself: why is it that the government hasn't been able to make even a minor dent in the big, bloated cylinder of LPG subsidies?

A quick summary of that reality byte would read: "Revealed Preferences." In plain English, I believe it would read: "Talk is cheap."


  1. Rahul said...

    I don't see what's "fundamentalist" about supporting international trade, foreign companies or free markets. Given the lifestyles of urban Indians, I'd call any other stance hypocritical.

    As for LPG -- while the government hasn't successfully floated the price, it has allowed private companies, who are finding a market despite the higher price. I myself use a private supplier; among other things, the public sector companies require a ration card, which I have no use for. True, the market is small, because of the artificially low price set by the government. It is not a free market when the government is actively distorting it. (The government's subsidy of LPG is not without cost: it comes from our taxes and affects government spending on other things. By all means subsidise cooking fuel for the poor, but why the rich or the middle class?)

    For a better example, look at the telephone market, pre- and post- private operators. Remember when you had to wait literally years for a telephone connection? Now, not only can you get a landline in a couple of days, or a mobile over-the-counter, from private operators -- you can get them from BSNL too. If you couldn't, BSNL wouldn't survive.

    Remember when your choice of car was Ambassador or "Fiat", you had to wait for years to get one, and good second-hand cars were actually more expensive than new cars? Remember when you could not freely exchange currency and were limited to $100 or some such absurd amount when going abroad? Currency trade still isn't a free market but it's almost there now, and there's no reason to expect disaster if the rupee became fully convertible.

    What exactly was so good about the good old licence-permit days?

  2. Abi said...

    Rahul: Oops! I didn't intend this post to imply that I wanted to go back to the license raj! I wrote it just to point out that the enthusiasm for free markets is not as great and widespread as Nitin hopes/claims.

    The popular opposition to the LPG free-float is revealing. If people are against a free market for something as simple and affordable as LPG, what good is a 70+ percent support for "free markets"?

    I'm completely with you on the desirability of a free market for mobile phones, cars, currency markets, and yes, LPG, too. I'm also with you on the need for helping the poor (e.g., subsidizing their cooking fuel).

    BTW, I think Nitin's use of the word 'fundamentalist' is in response to Krish's preferred label for the entire IEB crowd (and a whole bunch of others as well): "free market fundamentalists".

  3. Sharath said...


    If in addition to the deregulation of LPG (and higher prices thereof), the urban middle class were also reminded that a freer market means say 20% less marginal income tax rate, then they would surely take it.

    Using a single case of LPG prices alone does not make a strong argument.

    Its nobody's case that each and every thing will be cheaper/better with a more free market like structure - its more of it being overall preferred in the light of all changes.

  4. Rahul said...

    Abi -- I suppose everyone wants things good and cheap. While (depending where you live) you may have to wait days for Indane to deliver the cylinder, you're still likely to get it before the second one runs out; and the quality is fine. So people don't want the prices to change, even if it means better service. But if LPG quality goes down (as with petrol) or delivery delays increase, I predict the private guys will become more popular. With telephones, a wait of years for a fresh connection, and downtime of weeks every time it rains, was not acceptable.

  5. Ashutosh said... seems that eons of free market fundamentalism would not be enough to erase the socialist genes endemic in all Indians ;)

  6. Anonymous said...

    Everybody and his neighbour wants free market in those things that they are not adversely affected...

    Reading Garret Hardin ' Living within Limits ' is recommended for such people...

  7. Krish said...

    If anyone seriously think that free market system works in all cases, they should look no further than privatization of electricity in california and its associated troubles. Free markets are good but a totally unregulated free market system is plain rubbish. It will take several decades for the infatuated Indians to even realize this simple fact.

    PS: I agree with you that people are missing why Nitin used the term :-)

  8. Sharath said...

    @krish : Straw man argument. You win. :-)