Saturday, October 15, 2016

Public policy in establishing markets

Samir Saran and Vivan Saran argue that Government of India's role in certain markets may be impeding its own Make in India initiative. The example of BSNL is instructive and I am inclined to agree. BSNL's greatest negative externality may well be that its presence crowds out other far more efficient private operators in public procurements of telecom services (by government entities), which forms a very significant share of the country's high value telecom services market.  

But I am not sure about whether the argument that government intervention to create the RuPay card through the National Payment Corporation of India (NPCI) belongs to the same category. In fact, the RuPay is already shaking up the market for payment transaction gateways which is currently under the vice-like oligopolist grip of "market" players like Master and Visa. A RuPay disruption may well be the difference between the widespread adoption of digital payments in a highly margin and price sensitive market like India. 

If the government can calibrate its arms-length role and gradually exit, then this should count as one of the great global examples of a public intervention to address a market failure. In any case, even with the heavy guidance by Reserve Bank of India, this is one of those market interventions that was long over-due. 

Amidst all this, one should not forget that the biggest disruption of them all, Aadhaar, was a government intervention. So is now the NPCI and its catalysing the roll out of the Unified Payment Interface (UPI) for mobile payments. The eco-system of digital payments is being created, maybe unwittingly, through direct government interventions. And, interestingly, this has involved not just enabling regulations but also the establishment of service providers and even products. 

1 comment:

Unknown said...

A different way to think about this is whether the govt needs to offer a full-fledged service itself like RuPay. Is there someone else, in the steps before the service, that can change the nature of the market, make it more competitive? Just as an example, if there are only two dominant TV or radio channels, then what govt could do instead of starting its own TV/radio channel. Asking this question may give us better ideas for making the market competitive.