Opinion Don’t underestimate the consumer

First,petroleum: it is well known that the oil marketing public sector companies ratcheted up losses in excess of Rs. 50,000 crores during FY 2008-09 because the government-administered sales price of diesel,petrol,kerosene and LPG was less than the market-based costs of acquisition. The reason these companies were not bankrupted was because of the government oil bonds — paper IOUs — that bolstered their balance sheet. A corollary of this policy — the costs of which in terms of lost productivity,operational inefficiency and shoddy service cannot be quantified — has been to kill competition. The oil bonds are not offered to the private sector and this has so tilted the playing field that all private companies have had to scale back their ambitions. Second,power: a just published report states that the opportunity cost of power outages,theft and captive generation is in excess of Rs. 200,000 crores annually. And third,infrastructure: McKinsey has written that if the current trends in inefficiency regards the development of infrastructure continue over the 11th and 12th plan periods (2008-2017),the country will suffer an opportunity cost loss equivalent to almost 18 per cent of GDP in FY 2017.

These estimates will no doubt be challenged but I doubt whether the fundamental message contained within the numbers can be disputed. The cost of shelving ‘good economics’ to pursue perceived ‘good politics’ is huge and increasing exponentially — so much so that sooner rather than later the price of such politics will become unaffordably high.

So the question: what if anything can be done to resurrect ‘good economics’. The usual response has been ‘nothing’. It is said that this is the price of democracy; that politicians cannot be expected to accept short-term pain (a la voter backlash) in return for ill-defined future benefits; that the government cannot ride roughshod over political sentiment — they are after all answerable to the political class — and that the companies do not have the operational autonomy to side step their government shareholder. But in today’s connected world a different and more cautiously optimistic answer should perhaps be considered.

The current impasse between ‘good economics’ and ‘good politics’ is because of the politicians’ perception of the reactions of the public. They expect a voter backlash to decisions such as a hike in the price of diesel or the curtailment of free power. And accordingly they block the policy despite the supporting weight of economic logic. Ipso facto the impasse can be broken only if the politicians were persuaded that there would be no such backlash and that the public would welcome economic statesmanship over political populism. The fact is that public opinion is the politicians’ lodestar. When that shifts,the politicians sway in sync.

Consumer preferences are not set in concrete. They alter in the face of new information and experience. The problem is that consumers are often ill informed. The majority of the public do not know for instance the implications of governments policies on fuel pricing,subsidies,free power etc. It is no wonder therefore that they react against suggestions that threaten to pinch their pocket. Were they better informed their responses to issues like a price hike might well be more muted.

The public does not respond simply to short-term issues. They are no doubt motivated by self interest but this encompasses not just immediate needs but also future gratification for themselves and their ‘yet unborn’. It is a mistake therefore to assume that consumers will always react adversely to decisions that inflict short-term pain. If rationalism is not unrecognised. Government have often used public opinion as an instrument of policy. At the height of the oil price crisis last year when prices were riding above $ 100 billion and subsidies were bleeding the exchequer,Malaysia circulated a white paper on the broader consequence of continued subsidies on economic growth and development. The paper spelt out in clear,non-technical and objective language the ramifications on subsidies on infrastructure development,education,health,the environment etc and made clear that its continuation would thwart growth. The purpose of the paper was not simply to prepare the public for a price hike but also to co-opt them in the government’s effort to bring around the political class. In similar vein,it might be a good idea for the Parikh Committee to issue not simply a technical report but also a paper for the public.

The underlying message is that public opinion is the essential domino. The impasse between ‘good economics’ and ‘good politics’ can be broken if this domino is moved. This is a difficult task but made easier by technology. The positive,cascaded impact of such a move could stem the current financial haemorrage.

The writer is Chairman,Shell Group in India,views are personal.