Friday, 28 January, 2022
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Talk Point: The regulatory philosophy of NAPA replaces the invisible hand of the market

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Under GST, the government is setting up a National Anti-Profiteering Authority to ensure businesses do not cheat consumers. The new authority will ensure the benefit of reduced prices under the new indirect tax regime is passed on to consumers, said Law Minister Ravi Shankar Prasad.

The authority has the power to impose penalties and even cancel the registration of a business if it does not pass the benefits of GST to consumers. The authority will also devise a method to return the money to consumers.

Will the creation of the National Anti-Profiteering Authority address consumer concerns or will it impair business?

The good intentions of policymakers – paving the way for the National Anti-Profiteering Authority under GST — are transparent here.

The “anti-profiteering” measures enshrined in the GST law round the circle by already providing an institutional mechanism to ensure that the full benefits of reduced tax rates flow through to the consumer.

Ordinarily, the government sets the tax rates and leaves it to the market processes to determine the pass-through by competitive price-setting.

But the market forces could fail if two or more firms collude to set the price higher than they ought to be by way of a cartel. Anti-trust authorities, through the competition law framework, monitor and discipline firm behavior ex-post to mitigate such a market failure. We already have the Competition Commission of India as the antitrust regulator to inject firm discipline in such cases.

Here are other sharp perspectives on the National Anti-Profiteering Authority:

Dhruv Rathee: activist and YouTuber
Avi Singh: advocate and Additional Standing Counsel for the govt. of NCT, Delhi
Amol Kulkarni: fellow, CUTS International

The regulatory philosophy underlying NAPA replaces the invisible hand of the market with the visible hand of the state and empowers the bureaucratic machinery to, in effect, determine price of goods and services.

Public policy offers a few lessons for a state directly interfering in price-setting in such a manner.

Malaysia enacted its “Price Control and Anti-Profiteering Regulations” in 2014. A study of its experience would reveal that compliance became difficult with the complexity of the business. A few goods and services markets may be so commoditised as to compete only on price. It may be difficult if not impossible for bureaucrats to second-guess the spread between prices on account of product differentiation.

Australia offers a more moderate approach. It situated the powers to regulate with the anti-trust regulator called the Australian Consumer and Competition Commission. Having an entity with institutional competence to monitor appears to be better approach as a second-best option.

To conclude, the law of unintended consequences places limits on noble intentions. Policymakers confront trade-offs and cognitive constraints rather than a binary choice. Restraint in direct interference in the market may be more feasible than activist regulation thereof. The proposed NAPA may become a cautionary tale.

Mandar Kagade is a consultant with Finance Research Group at IGIDR. These views are his own. 

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