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Thoughts on Free Market Capitalism and Minimal Government

In 1997, JTM which was later acquired by Bharti Airtel launched Mobile services in Bangalore. While fixed line call cost was One Rupee at that point of time, JTM launched its service with Outgoing calls costing Rs.32 per minute and Incoming calls costing Rs.16 per minute.

Twenty years later, we have come to a stage where we get Incoming / Outgoing / Roaming, Internet & STD for nearly free.  The whole model in Telecom has been turned on its head in a time frame lower than a single generation.

For decades, Price Control in India meant that there was very little of production of anything – from Scooters to Cars to Telephone, not only was choices limited but price control meant that there was a multi-year queue if you wished to get your hands on them.

If one were to take Liberalization of the economy as having started in 1991, we have spent just around 60% of the time we spent under a price control economy. Yet,  once in a way, it would seem that we are more happy to go back to the old world of price controls with the only difference being we want the higher level of quality we have got accustomed to but at a lower price.

On Friday, the stock price of multiplex operators went down by 12 – 14% due to an announcement by Maharashtra Food supply minister Ravindra Chavan that outside food will henceforth be allowed to be carried into theatres. But while that itself was a bummber, what panicked the markets was the addendum that they will also ask Multiplex operators to bring the food prices at par with market levels.

Since most multiplex operators generate 30 – 40% of their revenues and more of their profits from selling of food and drinks, investors weren’t wrong about being worried, especially since many of these worthies are trading at pretty high valuation compared to rest of the markets.

Some time back, there was a strong call to the government to intervene and ensure that Bank charges were lower – they are actually pretty low at Public Sector Banks but Private Sector Banks were the target since their charges are much higher.

Last year, the price of Stents used for Angioplasty came under price cap with the National Pharmaceuticals Pricing Authority of India placing a price cap on the same. NPPA is the authority on fixing of prices and availability of the medicines in the country, under the Drugs (Prices Control) Order, 1995.

In late 2017, an Indian Parliamentary panel recommended fixing an upper limit on airline fares even though Indian Airfares aren’t really that expensive and the wide choice has meant that consumers aren’t limited in their options.

Decades before the arrival of discount brokerage firms, SEBI had to come out with rule limiting maximum brokerage that could be charged at 2.5%. Today, we have options of not having to pay a single rupee in brokerage for delivery trades.

While the upper cap didn’t really help for brokers would just pad the price up or down, depending upon whether you were the buyer or seller, competition has ultimately resulted in investors paying lower and lower fee and one where the price of the trade wasn’t padded either.

Wherever there is no competition and the business entirely run by the government, prices while are low, thanks to being subsidized by tax payers, there is very little incentive for better services. The failure of Socialism offers ample proof in this regard.

Incentives are the key to growth, stymie them and there is no growth for no reason to work harder when one gets the same returns regardless. While public sector banks are today under the microscope due to the burgeoning of Non Performing Assets, they have always been a under-performer only hid by their ability to get away by offering low or no interest to large part of their customers.

Solar Electricity is now closing on in terms of price with Coal which has the cheapest for decades and yet, when it comes to our own Electricity Bills, the only path that we see is higher. This once again because there is no competition and most of the electricity boards is public sector enterprises.

Governments intervention can lead to short term good but damage on long term for there are always consequences of disrupting the flow of goods and consideration. What today may seem like a excellent move may tomorrow be blamed as the seed that eventually pushed one back.

China’s government in ways similar to India’s enforces an interest rate that is well below what the markets should be offering. This has led to a concept called “Shadow Banking” which based on estimates are as much as 30% of assets owned by formal banks.

They key focus by government should be to write and enforce rules that foster competition and result in low wastages. It’s not the job of the government to set prices for this only result in more corruption and higher costs for everyone.

Unlike the United States, where choices have over time become smaller and smaller, the choices available to Indians are far from limited when it comes to businesses from Retail to Theatres. So, you can watch a movie in the cheapest of settings – once upon a time used to be a Tent / Temporary Shelter to Multiplexes in malls which offer a wide choice at a premium price.

I love to meet and catch-up with friends and acquaintances at Coffee shops. While I am a fan of drinking good coffee, neither of the big format Coffee Shops such as Starbucks or Coffee Day provide me with the best Coffee. Yet, they offer something, and at a price, that is worth the money, the ability to have a decent discussion without being asked to move out once the Coffee Cup has got over.

When it comes to Multiplex, the question that needs to be answered is; are they just another theatre that shows movies or a place where you buy the experience. If you only wish to watch a movie, any movie theatre should do the trick, but if you are for the ambience and look out for quality, shouldn’t one be paying more.

 It’s not enough that one votes for a politician promising minimal government, it’s equally if not more important that one also ensures that government interventions are kept to the minimum. Every intention starts with good intentions but end up as a measure that brought only negatives to the Industry as a whole.


One Response to “Thoughts on Free Market Capitalism and Minimal Government”

  1. There is something called monopolistic practices , which is also against free markets.
    In case of multiplex it has become an industry practice whereby ; Industry as a whole has made F&B expensive by not allowing outside food.
    Can you get a Theater experience where F&B is reasonable? The answers for most cities is No.

    Assume if Airlines as a industry practice get into multiplex kind of situation whereby you cannot get outside food and water and only choice left is to buy F&B at 5x price or 10X price should that be allowed? What will happen when you take long flights? Well if you go by free capital markets without any controls ; you might say starving is an option.

    Posted by Prof.Doshi | 15th July 2018, 12:55 pm

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