policy. Does this statement mean that othersections do not deserve a 'progressive' pricing policy? In any case, what is this 'progressive' policy anyway? One has to be verywary of terms like progressive': they implydifferent things to different people.Economists (and I suspect authors of thePaper belong to this tribe), in particular,ought to know the ambiguity attached tothese terms better than anyone. For example,Adam Smith, who was once considered a'radical', is now viewed as a 'conservative'.
In paras 4 and 5, the authors seem to
imply that the ''wider interest' of equity andsocial justice can only be served, if essentialitems are subsidised and the market forcesof demand and supply are not allowed a freehand. This line of reasoning appears to glossover several issues. First, it is not clear whatthe authors want to suggest as the 'goal' of the price policy. Is the goal to 'subsidise' orto 'lower' prices? If latter is the goal (andseems reasonable to assume that it is), thenis subsidising the best way to achieve it?Further, the authors imply that the freeplay of market forces will not lead to lowerprices. Here again we need to consider twoissues in trying to assess the real problem.Is it the free play of market forces or the factthat markets do not work as they are supposed to, due to all kinds of distortions?Presumably, the authors remember the controversy surrounding the nationalisation of the wheat trade and the subsequent denationalisation. In many cases, the problem appears to be the existence of monopsonisticmiddlemen and not the market forces. Thusthe solution ought to be the elimination of middlemen and not the market forces.One also has to explain the inconvenientempirical evidence in this regard. For example, in 1983 the decontrol of cement pricesled to the glut of cement and extremely affordable prices. If one asked the consumersthey would say that their interests were bestserved during the period of decontrol, notwhen the price of cement was 'administered'.In the public enterprise literature, perversedistributional consequence of subsidisedprices is well established. Jones  citesseveral examples from around the developing world to show how, often, subsidisedprices do not benefit the intended parties(but the middle men). In this context, Jones(1985) makes an important distinction whichthe authors of the Discussion Paper haveoverlooked. He differentiates between'Pareto-efficiency' and 'political-efficiency'.As all economists know, a 'Pareto-efficient'reallocation of resources is one which makessomeone better off without making anyoneworse off. Jones  defines 'politicallyefficient' reallocation as one which makessomeone better off without making anyoneelse 'aware' that he
worse-off.No one can deny that transferring incomefrom one individual or segment to another,in the interest of equity and social justice,is a perfectly legitimate public policy goaland a prerogative of political power. Inaccomplishing this objective, however,politically efficient solutions are oftenpreferred oyer Pareto-efficient ones andmanipulation of public sector prices provided an excellent vehicle for achieving thelatter. A more thorough treatment of this important issue would have gone a long wayin making the Discussion Paper wholesome.Finally, the Discussion Paper highlightsa curious dichotomy in government thinking. At about the time the authors of thisPaper were suggesting that free play of market forces is not desirable, the government of India was actively propagating amove toward liberalisation. The underlyingassumption of the latter approach was thatfree play of market forces is good for theeconomy. Some references and an attemptat reconciling these two seemingly conflicting policy pronouncements would have been
Para 2 asserts that a "clear policy onadministered prices leads to a more stableeconomic environment." However, it doesnot tell us why the policy has not been statedclearly in the past? Perhaps, it was. If so,what was the policy? Where was it stated,and why is a new one required? By notanswering these questions, which come toone's mind naturally, the Paper leaves thereader unsure about its purpose and
In discussing the role of the public enterprises in the Indian economy (paras 6through 8), the Discussion Paper does notmake any reference to the distinction between the central and state-level public enterprises (PEs). The figures quoted are forcentral PEs only. An explicit pronouncement on the role of state-level PEs, as wellas the reason for excluding them from thediscussion would have clarified the issues.Most people would agree that reforms in thepricing policies are much more urgentlyneeded in the public sectors of various statesof the union rather than at the centre.Therefore, it is important to know whetherthe principles discussed in the Paper alsoapply to the state-level PEs. This issue couldhave been covered in the section entitled.
'The Scope of the Paper', but, was not!
A great deal of confusion in the sectionentitled "Introduction" can be attributed tothe lack of discussion on two broader conceptual issues. The first one relates to theplace of pricing issues in the economics of public enterprises. The second, concerns therelative importance
reforms in performance evaluation versus reforms of the pricing policies. Let us discuss each of thembefore proceeding.The economics of public enterprises canbe divided into the following three distinct,though interrelated, areas.
It deals with thequestion "Should we or should we not setup a particular public enterprise?" It alsodeals with issues related to expansion ordivestiture of an already existing PE.(b)
It takes the investment decision as given. That is, it assumesthat the public enterprise already exists, anddeals with the question: "What price shouldbe charged?"(c)
Given theinvestment and pricing decision, it asks thequestion: "How well is the PE managementperforming their job?"As mentioned earlier, these are not watertight categories, and often the issues areintimately intertwined. Yet, they have emerged as separate areas of intellectual endeavourand, as a starting point, it is very useful toview them as such.By frequently mixing the 'pricing issues'with the 'performance evaluation issues', theDiscussion Paper is not able to do justiceto either. For example, in para 9, the Papersuggests that a "greater effort is required toensure that all possible avenues are exploredfor absorbing cost increases before finallydeciding on any price revision" From thisstatement it is not clear "who" should make"what" kind of effort in order to achieve thisend. It also raises the question whether theimplication is that such an effort has neverbeen made by the government of India. If not, then what are the reasons for it? Finally,if one cannot be sure of this 'effort', shouldone revise prices or not?Similarly, in para 3, the Paper suggeststhat "administered prices can play an important role in generating a constant pressureon every enterprise to improve efficiency,productivity and overall performance"However, it does not suggest, exactly, howthis goal would (could) be achieved. In fact,the above statement contradicts another onemade in para 9, where the Paper argues that"in a situation where all prices in theeconomy are changing, it is both unreasonable and counterproductive to delayprice revisions in the public sector''Within
a span of six paragraphs, the Paper suggests
that sluggish administered prices can be avehicle for increased as well as decreasedproductivity: however, the Paper does notsuggest any guidelines for determining whenthis point of inflection is arrived at.This kind of inconsistency has crept intothe Discussion Paper not ony because of theunnecessary mixing up of 'pricing' and 'performance' issues, but also because theauthors of the Paper have failed to disguisetheir singular lack of familiarity with issuesrelating to performance evaluation of PEs.Thus, in para 9, they repeat what must beconsidered the most hackneyed cliche in thisfield. They urge that "public enterprisesector must not only meet the wider socialobjectives assigned to it but it must also improve its capacity for surplus generation."it would be difficult to inter the vast areaof 'performance evaluation' of public enterprises, but it is worth raising some issues.For example, one wonders whether theauthors envisaged the possibility that theremight, indeed, be a trade-off involved inachieving wider social objectives and increasing surplus generation. More importantly,do the authors have a methodology or asystem in mind which can measure theachievement of social objectives? Islheir anacceptable definition of the vague' term'social objectives'?Para 8, again, illustrates the points made
Economic and Political Weekly May 26, 1990