Not long ago, a Cuban student pointed out to the president of the National Assembly that they needed to work for two or three days just to buy a toothbrush. While Cuba is an extreme example of a country with too many regulations, the negative effects of regulations can be seen in India as well.
Although other countries outsource a number of services and manufacturing activities to India due to the availability of cheap labour, the effect of this cheap labour does not always translate into cheaper goods and services within India.
Some models of Toyota cars sell in India at double the price of these models in the US.
The median price of a middle class dwelling in Mumbai is more than the median price of a middle class dwelling in the suburbs of Chicago. Electricity in India costs as much as it costs in the US. In each of these cases, the government raises the cost of the goods either through taxation or by squeezing out the supply. While taxes and duties have raised the cost of items like automobiles, the imposition of excessive restrictions has caused a shortage in the housing sector leading to skyrocketing prices.
The higher prices benefit neither the businesses nor the members of the labour force.
While labour in India is cheap, businesses that operate purely under market forces have no reason to kill their market by pricing goods beyond the reach of potential customers.
Besides, if such businesses were the reason for the higher prices, they would have charged the wealthier American customers more than what they charge Indian customers.
The money from the additional cost of goods goes to the government but this does not result in good quality infrastructure in the country. The only discernible effect of such revenue collection is that politicians regardless of party affiliation grow richer every year despite never having worked in any useful job.
Apart from taxes and duties, subsidies too have detrimental effects. One of the greatest miracles of socialism is that goods and services become more expensive when governments subsidise them. Automobile fuel is more expensive in India than in the USA despite being subsidised by the Indian government.
While Americans benefit from falling fuel prices when the market price of crude oil falls, the only direction in which the price of fuel moves in India is upwards. Sectors with a subsidy of a hundred per cent, that is, goods and services offered for free by the government, are so bad in quality that nobody wants them. This is the case with the government's free education system.
The USA, too, is not without faults but its faults are similar to those in India. Subsidies in the US too have driven up costs. This effect is most visible in the health care, education and housing sectors. Universities that provide subsidised education and pharmaceutical firms that supply drugs for government programmes have colluded with politicians and raised the price of college tuition and drugs to arbitrarily high levels knowing that the government will fund them no matter what the price.
Investment banks that provide subsidised housing loans have increased their profits through an expansion of their customer base by providing loans to people without the ability to repay them knowing that the government will bail out the banks when defaults occur. This scheme led to an artificial demand for houses and developed into a housing bubble that finally burst in 2008 creating a major crisis.
The ill effects of government interference in the economy can be observed in sector after sector in the US. Even in simple things like travel, government regulated travel costs several times the cost of using the private sector. While a vacation to the Caribbean costs just a few hundred dollars, a trip to Cuba which is regulated by the US government costs thousands of dollars with the extra cash going to government officials and those who have managed to become licensed tour operators.
By their very nature subsidies rarely reach the targeted groups. Like all other regulations, they enrich a few people while making everyone else pay for them. Every year, the Indian government announces new regulations and new subsidies, and every year, the price of everything goes up. If the claim is that they are driven by good intentions, it would be apt to recall the words of John Capper, the nineteenth century proprietor of Ceylon Times, who criticised the "good intentions" behind government schemes in India by pointing out that the "intentions have paved the way to beggary".
The author can be reached at arvind@classical-liberal.net
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