News

What is the one thing that all governments in the world, without exception, are great at doing? I have you scratching your head there, don’t I? ‘Amit thinks there’s something governments are actually good at doing? Is this April Fools Day?’

Here’s my answer: they’re all good at redistributing wealth from the poor to the rich.

I have written before about how all interventions in the free market amount to a transfer of wealth from “the relatively poor masses to a specific relatively rich interest group.” The BJP government just provided us a great illustration of that with some new regulations on e-commerce businesses in India. On the face of it, there’s good news, because they’ve finally ‘allowed’ 100% FDI in online retail. But then there’s this:

It also notified new rules which could potentially end the discount wars, much to the disappointment of consumers. This is because the rules now prohibit marketplaces from offering discounts and capping total sales originating from a group company or one vendor at 25%.

This affects many of the existing players adversely. Big Basket, for example, might have to shut down entirely, says FutureGroup CEO Kishore Biyani. Flipkart and Amazon will also face restructuring problems. But forget these companies, and dig a little deeper to see who really suffers here.

We do. Whatever costs these companies face are passed on to consumers. A decrease in competition also affects the value for money that we get. This is axiomatic. Because of these regulations, we will get less bang for our buck. We are, effectively, losing wealth. Where is this wealth going? For this, think about who benefits.

The BJP has long considered small-and-medium-sized traders to be an integral part of its votebank. They were getting adversely affected by online retail, as consumers obviously gravitated towards whoever gave them more value. Traders are an important interest group for the BJP not only because they represent a votebank, but also because they contribute to the campaign coffers of the BJP. And money buys power for what? To make more money.

These regulations benefit these brick-and-mortar retailers and traders, as they will lose less business than they otherwise would because online retailers will be able to offer less value than they otherwise would.

In other words, this is a redistribution of wealth from poor consumers at large to a specific relatively-rich interest group. (Indeed, given the quid-pro-quos involved, you could argue that the party in power is itself the final beneficiary of this transfer of wealth.)

Another data point on how this government is helping this particular interest group: Gujarat has just passed a bill imposing new taxes on all “goods purchased through e-commerce portals.” You know who this hurts, right? You know who this helps?

Governments always carry out such interventions using noble rhetoric of ‘leveling the playing field’ and helping those poor [insert rich interest group here]s. But the beneficiaries here are not owed a living by anyone, and are not entitled to any money apart from what consumers willingly give them in a free market. The money that the consumers would save because of unhindered online retail, after all, would have gone back into the economy in some form. (For more on this, I refer you to the great Frédéric Bastiat’s famous essay, ‘What is Seen and What is Not Seen.’)

*  *  *

Here’s my three-fold path to evaluating government policy:

1. Ignore the rhetoric.

2. See who it helps.

3. See who it hurts.

It’s the same story, always, every time. It’s the poor who suffer.

*  *  *

Also read: ‘The Great Redistribution’, my earlier column on this subject, where I use an example where the protagonist and antagonist interest-groups in question are the reverse of the ones in this post, but it’s still the poor who suffer.