Nitin Rao

$3000 Car: Role of Government

TransportationAfter my post Small Car Activity and the article in the Independent criticizing the new venture, I received the following mail from a friend in Bangalore:

The demand for automobiles is growing primarily because of the neglect by the government of metropolitan transport infrastructure, leading to an increased desire among the public of personal transport. This, when coupled with the easy availability of finances on credit and a Finance Minister who encourages spending, leads to the growth of markets that would not be sustainable with even a modicum of saving on the part of the spenders of today. This could lead to a situation where the total debt owed by the spenders far exceeds the amount earned by them, for interest rates and prices often keep pace with salaries. In a country like India, with not a vestige of a Social Security net, this spells a disastrous situation, in my opinion, for most of the spending encouraged is on the part of the urban nouveau riches who have nothing but their work and savings to fall back upon. While economic growth is no doubt essential in India, I fear that it will not be on a sound basis when built on such a rotten foundation where the economy grows as a whole on account of increasing demand, but individuals suffer, being led to spend on non-essentialities.

A model of economic growth that has always appealed to me, is one where the government would attract investment into the country, as is happening today, but instead of relying on its own market and encouraging ever-more-unsustainable spending, would try to make its goods more attractive for export than for consumption in the home market; I would cite the West Asian, Northern African and the smaller South American countries as ideal markets for export of goods. In other words, I suggest that the government bring in funds and create jobs thereby, but instead of encouraging excessive spending in its own markets to keep up the attraction of this country’s market for investors, start promoting the country as a manufacturing and export hub. In my opinion, were the government to improve urban transport and infrastructure and start encouraging automobile export, the ever-growing demand for cars and the problems that accompany it would decrease.

Like my friend, I am from Bangalore (or Bengaluru, if you like) – and can readily identify with the issues of bad public transport. Indeed, WRI is involved in exploring solutions to transportation problems.

The difference is – unlike my friend – I do not believe that the onus should be exclusively on the government to solve these problems. Decades of excessive government control have only insulated and delayed India’s participation in broader global markets. If cars should be driven out, they should be driven out by consumer choice and convenience – and not by government regulation.

The assumption in theory is that incentives for private players to invest in public transport will correct these anomalies. Unfortunately, the truth is that projects like Metro Rail and International Airport have been plagued by disputes and political haggling.

As far as export opportunities go, Rob points out that India has tried that before, and it hasn’t worked well for many countries. Isn’t creating local value what the BOP hypothesis is all about (whether producer or consumer)?

Be it a $1 fairness cream, a $100 phone or a $3000 car – a large audience is disturbed by “failures” in markets – and seemingly wants the government to step in to decide what is right for the consumer.