Failure of HMT and Aakash tablet

July 26, 2015 § Leave a comment

If you were looking for a simple economic explanation for why a state’s desire to affect markets through a deliberate adventure is unadvised, see this blogpost by Ajay Shah:

Suppose a government is unhappy at the price or quality of wrist watches that are being made in the private sector. Should the government indulge in muscular interventions into the free market’s outcome?

The standard thinking of public economics runs in three steps: (1) What’s the market failure? (2) What’s the proposed intervention; does it attack the market failure at the lowest possible cost and (3) Do we have the State capacity to pull off this intervention?

So in the decades of planned “self-sufficiency”, these are the sort of interventions that Indian government undertook. For example, giving Hindustan Machine Tools, or HMT, the exclusive right to produce and sell wrist watches. HMT closed down earlier this year, and has been largely pointless as a corporation for a few decades. One would think that in the semi-liberal era, the government would not make the same mistakes again. But it has done that, multiple times. The one I want to take the example of is Aakash Tablet.

Case of fixing a market failure: Five years ago, the argument that affordable devices for students were needed and that no “greedy” private corporation will ever innovate in this area and be accommodative of the perceived requirement of the market while supposedly forgoing profits. So essentially, it failed to understand both the demand and supply trends.

“Lowest possible cost”: The government subsidised/funded the development and production of the Aakash tablet. In doing so, it created a product with “minimum” acceptable hardware and facilities. It bombed, unsurprisingly. It failed the basic product principle that minimum acceptable > minimum viable

State capacity: The government had neither the resources nor the focus necessary to develop  a quality product. It pawned it off to IIT Bombay which wasn’t able to create a commercially strong product and to a Canadian company which did not have the experience or the capacity to deliver the product. the one time there was some demand. IIT has now called it quits on the program, ending the farce. Let’s hope somebody takes an account of how much did this misadventure cost the taxpayer.

Referring back to Shah’s post on the diagnosis:

The problems with such interventions run at three levels. First, the free market works pretty well, and even well meaning politicians and officials have little value to add (other than addressing market failures). Second, politicians and officials may not be well meaning uncles, they are regular guys and chase their own selfish objectives. Third, even if the right objectives are established, implementation is very hard; scarce resources (money and time of top management) will be used up in doing extraneous things which comes at the cost of those resources being applied to the core business of government, i.e. addressing market failures.

Shah also provides a segue way into current interventions by India in its currency market and China in its stock market.

A government says that stock prices won’t be allowed to go down? This changes the behaviour of investors who think it’s a one way bet and pile on massively. When INR was a “managed appreciation” with small predictable appreciations week after week, this kicked off a surge of capital coming into the country. Risk taking is higher when there is “the Greenspan put”.

A government says that exchange rate volatility will be kept down? This changes the behaviour of private participants who feel safe and don’t hedge currency exposure. News breaks; INR should have depreciated; government props it up; capital flight by locals and non-residents benefits from a red carpet in the form of a more attractive exchange rate.

Read the whole article by Ajay Shah here.

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