Simple solutions for policy conundrums that we often overlook: Economic Times 21st June 2012

Very often we keep looking at the bigger picture and search for complex solutions, when there are easy options available. This holds especially for policy. While there are contentious issues like fuel subsidy or economic reforms we get into a muddle when there are rigid conflicting views that thwart decision making as in a democracy we have to balance diverse opinions. But there could be easy choices. First, let us look at the fuel subsidy. It is true that diesel, which is subsidised by around Rs 10-12 per litre, is being used by passenger cars, especially high end ones. To make them pay the market price, there are two options. The first is to simply mark certain locations, maybe metro cities or predefined urban areas and supply diesel at the market price. True, at the margin, vehicles would move over to a nearby territory and buy subsidised fuel or trucks would have to pay more in these cities. But there would be savings nonetheless and a beginning would have been made. The other is to track the number of diesel run cars - a guesstimate is that there could be around 5 million as there are around 40 million passenger cars of which, say, 5% run on diesel. An annual tax could be levied on all them through the insurance policy, which is mandatory. Assuming a consumption level of Rs 100 litres a month or Rs 1,000 litres per annum, at a charge of Rs 10/litre, a sum of Rs 10,000 could be added and collected from all owners. This is superior to the proposed tax on diesel cars as it will be a continuous flow. Insurance companies could be given a commission to incentivise them. Second, one of the reasons for inflation is high minimum support prices (MSPs) offered by the government. Given that these prices are operative only for rice and wheat where there is public procurement, the others are superfluous from an economic standpoint. They simply add to the benchmark prices in the market and do not go on the basis of demand-supply metrics as for all other crops the market prices are higher than the MSP. By abolishing these prices, we could let the market determine the prices and not have the government indirectly push them up. Third, we have an anomalous situation where high production of rice and wheat coexist with shortages in the market. This is so because the FCI has an open-ended procurement policy where foodgrains are finally hoarded by the state. With the government procuring around 35% of wheat produced and another 30% being used for self-consumption, the market actually gets only 35%. A solution is to cap the amount of procurement while giving cash payments to those who do not sell to the FCI. This way the subsidy remains, but the shortages are addressed. Fourth, we are divided when it comes to FDI in retail and there are strong explanations on both sides. We can think of getting in foreign capital to a limited extent in the existing outlets of, say, all state cooperative stores. These outlets already exist and by laying down conditions of employing existing employees and bringing in the capital and technology, we can strengthen these cooperatives, like Sahakari Bhandars and Apna Bazars, which will be more palatable. Fifth, we get worried when the exchange rate moves up or down as we are used to having guidance from the RBI. Forex is like any commodity and the price should be determined in the market. The RBI should not interfere once the rules are laid down. If the rupee keeps falling, imports automatically become dearer, travel less attractive while exports receive a thrust and inward remittances receive more rupees. Equilibrium will follow in course of time. Sixth, in the money market, there is a tendency to support liquidity without any limit which creates distortions. The RBI should fix the amount of money that can be borrowed through the repo window and let the market decide thereon. Call rates will surely get spooked, but will be representative of liquidity conditions and banks will use their money more effectively. Presently, due to forex intervention, the RBI is squeezing liquidity and then providing the same around the corner through the repo window. This is quite unnecessary.