The recent restructuring of the Goods and Services Tax (GST) has turned into a political-electoral event, rather than a purely economic-legal one. News emanating from various reports indicate that the Government is hell-bent on forcing companies to reduce prices, and pass on the benefits of the tax cuts to the consumers. It wants the producers and sellers to showcase the pre- and post-GST 2.0 prices to be displayed on an official website. The heavy industries ministry wishes auto makers to do the same, along with a photograph of Prime Minister Narendra Modi. Bureaucrats across the nation have been asked to monitor the market prices through regular field visits over the next few months. What is interesting is that FMCG companies have urged the Government to do so over the next six months.
While it is laudable that the ruling regime wishes to ensure that public interest is upheld, and buyers get the best prices, there are a few questions that need to be answered when the Government gets into the business of managing businesses. Officially, the changes in GST are being touted as major reforms, the next-generation ones. Yet, the officials will decide how prices move, and what they need to be, i.e., lower than the earlier ones. This is akin to the old socialist days, when institutions like the BICP (Bureau of Industrial Costs and Prices) studied cost structures, and recommended retail prices for products across industries. In 1997, as a part of reforms, it was merged with the Tariff Commission, which was recently wound up.
Several business factors can enthuse companies to cut prices, retain them at the earlier levels, or even increase them. The laws of supply and demand, coupled with costs, productivity and efficiencies, along with technology and market disruptions determine prices. In the age of reforms, market forces need to impact prices. If the firms wish to shore up slagging volumes, they will lower them. If margins are under pressure, but sales are comfortable, they may not do so. If they have absorbed extra costs in the past, they may hesitate. The Government cannot decide to act like the corporate marketing heads, and force product prices to come down, or go up. It is like the political appropriation of anti-profiteering rules that were legally discarded.
What is more dangerous is that the corporate world is coaxing the Government to get into the pricing debate. The larger firms are possibly scared that while they may be forced to cut prices, since they are under the official glare, the small- and medium-sized firms that offer intense regional competition, especially in the rural and semi-urban markets, may not follow suit. This will create an unlevel playing field, and distort sales within the sector. The smaller firms are worried that the larger firms may reduce prices for a short while, kill competition from the smaller players, hog a larger market share, and later hike prices and earn extra profits on the same products. Thus, there are pressures on both categories to seek the Government’s intervention, at least for six months or so.
Civil servants will unnecessarily get involved in political pursuits. They will need to spend time scouting and searching the markets, and become the marketing eyes and ears. Every few weeks, they will become the official informers on whether prices are down, and pinpoint the erring manufacturers and sellers. The relevant ministries and departments will get into the act to twist the arms of the errant players. The companies will seek ethical and unethical ways to find loopholes and justifications. Theatrics will play out in conference rooms, boardrooms and Government offices. Consumers will lodge complaints or applaud. It will be a new way to play politics in an economic-business game on the national arena.
In the recent past, this newspaper highlighted yet another case of the Government making it its business to influence businesses. This was related to Vodafone-Idea!, where one of the private partners raised doubts about its ability to continue operations. Saddled with debt, both real and those imposed by the courts, Vodafone stated that it might declare bankruptcy, and shut shop. Since the Government is the largest shareholder, with a nearly 50 per cent stake, thanks to the conversion of debt into equity, it decided to intervene, and seek a White Knight to invest a billion dollars. Yet again, when the law allows large firms to go bankrupt, why help one company?