ONE PRODUCT, ONE PRICE

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The one time I really feel fleeced is when I want to have a soft drink in the middle of a flight. The soft drink can that you get in the market for thirty bucks costs as high as Rs 100 on a flight. Sandwiches and noodles retail for Rs 200.

A similar rip-off happens inside cinema theatres as well. Everything from soft drinks to bottles of water to popcorn is exorbitantly priced. In fact, the companies help both airlines as well as cinema theatres by producing the same products for them, but at a different maximum retail price. Hence, the same can of soft drink which costs Rs 30 outside, costs Rs 100 on an airplane. The same bottle of water which costs Rs 10 otherwise, costs Rs 30 inside an airplane or a cinema theatre.

This essentially means that companies end up offering the same product at different price points at different places. This essentially violates what economists call the One Product-One Price principle. And what is this principle? As the Economic Survey of 2015-2016 points out, it is basically the “intuition that products which are essentially the same should be charged essentially the same price.”

What allows airlines and cinema theatres to charge more is the lack of an option. When one is inside an airline, there is no other option. And the same stands true for a cinema theatre as well. Hence, the violation of the one product, one price principle does not have any repercussions.

But the same cannot be said about other walks of life. Take the case of the subsidised goods that the government offers the citizens. This includes rice, wheat, kerosene and sugar, among other things When these goods are sold through the public distribution system constituting of around five lakh fair price shops all over the country, they are offered at a price which is much lower than their market price.

And what does this do? It violates the one product one price principle. Let’s take the case of rice. It is available at a price of Rs 3 per kg under the National Food Security Act. In the open market, rice sells at many times this price. Hence, it is but natural that the rice which has to be supposedly distributed through the public distribution system at an extremely cheap price finds its way into the open market.

This violation of the one product one price principle leads to “incentives to divert the subsidised commodity from eligible to ineligible consumers”. What is true about rice is also true about wheat, kerosene, sugar, domestic cooking gas and urea.

In a research paper dated January 2015 and titled Leakages from PDS (PDS) and the Way Forward, economists Ashok Gulati and Shweta Saini, put the leakage of the public distribution system for the distribution of rice and wheat at 46.7 per cent. In absolute terms the leakage was at 25.9 million tonnes. This basically means that nearly half of the rice and wheat distributed through the public distribution system doesn’t reach those it is meant for.

The leakage rate in case of kerosene is 41 per cent. In case of sugar it is 48 per cent. In case of urea the leakage rate is 41 per cent. As the Economic Survey points out: “The 75 per cent subsidy on agricultural urea creates a large price wedge which feeds a thriving black market diverting urea to industry
and possibly across the border to Bangladesh and Nepal.”

This basically means that the government ends up wasting a lot of money that it spends on subsidies. What is the way out of this? The answer may very well lie in cash transfers, wherein money is directly deposited into the Aadhar-linked bank accounts of citizens, allowing them to buy these goods at their market price from the open market.

This will ensure that the violation of one product one price principle comes to an end and the government subsidies are well spent.

The column originally appeared in Bangalore Mirror on August 24, 2016

 

 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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