Government control over price and distribution | Management Optional Notes for UPSC PDF Download

Introduction

• In the management of the nation's economy, the government plays a crucial role in regulating prices and distribution to ensure smooth functioning. It's well-established that good production loses its value if the goods are not delivered to end-users promptly, in the right quantity, and at reasonable prices.
• To safeguard consumer interests, the government often sets prices for products, typically lower than the equilibrium price. Similarly, during periods of abundant crop yields, the government may fix food grain prices at lower levels, which can adversely affect farmers who struggle to cover their production costs. In such cases, the government intervenes by setting prices higher than the equilibrium to support producers, particularly growers. Government intervention can involve setting prices either below or above the equilibrium price.

Economic Management Through Price Control

• Government intervention in competitive markets is motivated by various factors, including when the equilibrium market price is deemed too low or too high, or when the government seeks to generate tax revenue. Price intervention can take two forms: price ceilings and price floors.
• Price controls in a free enterprise economy aim to achieve optimal resource allocation under certain assumptions, including perfect competition in both product and factor markets, perfect divisibility of resources and products, and the absence of direct interdependence between producers and consumers. In India, price control has been a mechanism employed by the government to achieve economic objectives and implement Five Year Plans. However, economists generally argue that price controls often fail to achieve their intended purposes and should be avoided.

Objectives of Price Controls

There are four primary objectives of price controls:

• Protecting the interests of vulnerable consumer segments considering income distribution.
• Facilitating investment in priority industries crucial for fostering rapid economic growth.
• Preventing monopolistic exploitation by a few firms within an industry.
• Ensuring a reasonable degree of price stability.

Challenges and the Role of Government

• In the current landscape, private sector trade channels in India are not entirely reliable due to malpractices such as adulteration, hoarding, and profiteering, particularly during shortages. Rationing of food grains, initially introduced during the Second World War and reinstated after Independence on a statutory basis in 1954, is governed by the Essential Commodities Act, 1955. This Act aims to ensure the easy availability of essential commodities to consumers and protect them from exploitation by unscrupulous traders. 
• Under this Act, various ministries and departments of the central government, as well as state governments and UT administrations, issue orders to regulate the production, distribution, pricing, and other aspects of essential commodities trading. The enforcement and implementation of these provisions lie with the state governments and UT administrations.

Government Control Over Essential Commodities

The Essential Commodities Act provides the government with authority to regulate the production, supply, and distribution of essential commodities categorized into three classes: food items, raw materials for industries, and products of centrally-controlled industries.

Central Government Authority

The Central Government is empowered to designate any commodity as vital under the Act. Currently, over sixty commodities are listed as essential. Essential commodities include:

• Cattle fodder, including oil cakes
• Coal, including coke and derivatives
• Component parts of automobiles
• Cotton and woollen textiles
• Drugs
• Foodstuffs, including edible oils
• Iron and steel
• Paper and newsprint
• Petroleum and petroleum products
• Raw cotton
• Raw jute
• Any other commodity declared essential by the Central Government

Under the Essential Commodities Act, all authority is derived from the central government. State governments and their subordinate authorities act as delegates of the center, subject to any conditions or directions imposed by the central government, ensuring uniformity of practice across the country.

Addressing Price Fluctuations

In response to a significant increase in prices of essential commodities in mid-2006, immediate steps were taken to alleviate the rising trend. Representations from several states prompted the central government to restore powers under the Essential Commodities Act for de-hoarding operations, particularly regarding wheat and pulses stocks.

Government Initiatives

• To control price rises, the Central Government implemented measures to increase supply, including reducing import duties on wheat and pulses to zero. 
• Additionally, certain provisions of the Central Order dated 15.2.2002 were suspended for six months with respect to wheat and pulses. This decision aimed to address availability and price concerns.

Further Actions

• To facilitate effective de-hoarding operations by state governments, additional restrictions were imposed by keeping some provisions of the Central Order dated 15.02.2002 in abeyance for a year concerning edible oils, oilseeds, and rice. 
• These actions were intended to tackle rising prices and ensure availability to the public, with no restrictions on inter-state movement or imports of these items by state governments.

Summary

It is the government's responsibility to ensure the fair supply of essential commodities to the public at reasonable prices, whether in times of surplus or scarcity. This involves setting prices and managing distribution to ensure timely access for the right recipients.