[Answered]Government intervention, sometimes though well intended, often ends up undermining the ability of the markets and leads to outcomes opposite to those intended. Illustrate.

Demand of the question

Introduction. Contextual introduction.

Body. Discuss the issue of over-regulation by the government and its impact.

Conclusion. Way forward.

Though India has made significant progress in enhancing economic freedom for firms, it is still counted among the shackled economies in the world. In the global indices of economic freedom, India ranks in the bottom half. In the Index of Economic Freedom, India was categorized as ‘mostly unfree’ with ranking the Indian economy 129th among 186 countries in 2019. One of the reasons for less economic freedom is excessive government intervention that lead to markets not functioning properly.

Issue of over-regulation by government and its impact:

  1. Distortion: Any government intervention affects the supply and demand in markets and consequently distorts market equilibrium. For instance, frequent and unpredictable imposition of blanket stock limits on commodities under Essential Commodities Act have distorted the incentives for the creation of storage infrastructure by the private sector and development of national market for agricultural commodities.
  2. Rise in general price: Government intervention pushes the general cost of goods and services. For example, the regulation of prices of drugs, through the DPCO 2013, has led to an increase in the price of the regulated pharmaceutical drug vis-à-vis that of a similar drug whose price is not regulated.
  3. Market inefficiencies: Government policies in the food grain markets has led to the emergence of government as the largest procurer and hoarder of rice and wheat crowding out. This has led to burgeoning food subsidy burden and inefficiencies in the markets, which is affecting the long run growth of the agricultural
  4. Impact on welfare measures: Government intervention leads to the very intention of providing welfare to intended. For instance, debt waivers have disrupted the credit culture and end up reducing the formal credit flow to the very same farmers, thereby defeating the very purpose of the debt waiver provided to farmers.
  5. Hinder growth of a sector: Government policies many times act as a hurdle to a sectoral growth. For example, the increasing focus on subsidies is harming the growth of the agricultural sector in the long-run.

Way forward:

  1. Examining unnecessary interventions: Each department and ministry in the Government must systematically examine areas where the Government needlessly intervenes and undermines markets.
  2. Direct cash transfers: The farmers need to be empowered through direct investment subsidies and cash transfers, which are crop neutral and do not interfere with the cropping decisions of the farmer through direct investment subsidies and cash transfers, which are crop neutral and do not interfere with the cropping decisions of the farmer.
  3. Ease of doing business: Government has recently achieved significant improvement in the Ease of doing business index. Government should keep continuing similar efforts to remove procedural constraints.
  4. Consolidating laws: Unnecessary laws and regulations must be removed. Government must work in order to make laws simple and clear.

Competitive markets are effective in allocating resources in an economy. However, sometimes, the costs of Government intervention may outweigh the benefits. Thus there is need to eliminate instances of needless government intervention that will enable competitive markets and thereby spur investments and economic growth.

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