Tag Archives | Takshashila GCPP

When Popcorn Costs More than the Movie

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Image credit: PVR CInemas

Typical multiplex experience in Chennai – Popcorn: ₹180; Pepsi: ₹200. The all important movie ticket: only ₹120.

By Natarajan Ramalingam (@natrajdr)

While a cinema ticket in a multiplex costs ₹250 or more in other metros, the price caps set by the the state government in Chennai provides the same ticket at significantly lower costs. Sounds good, doesn’t it? Maybe, maybe not.

Tamil film industry has been entwined with the state politics for a long time – with prominent cine actors and writers becoming politicians on one hand and the use of movies as a medium for political messaging and image building on the other. Successive governments in the state have claimed cinema as “the primary medium of entertainment for the common man” . While the validity of the claim is difficult to prove due to the changing times and tastes of the public, the government however continues to make it.

This claim provides the legitimacy for the government to intervene and regulate the industry to make the medium of entertainment “affordable to the common public – especially the poor”.

The increase in popularity of vernacular cable TV during the early 2000s, led to a fall in occupancy rates in theatres. Faced with a consequent fall of the entertainment tax rate, the government allowed for variable pricing during the first two weeks of any movie’s release.

This variable pricing mechanism did not impact tax collection as much of the increase in pricing was in “black” and was pocketed by the cine distribution/exhibition industry. The politicians saw an opportunity in this space to show themselves as pro poor by regulating the prices – with minimal impact on revenue to the state.

On 1st Jan 2007, the State of Tamil Nadu, through an amendment to the Tamil Nadu Cinemas (Regulation) Rules, fixed the minimum and maximum prices that can be changed for cinema hall tickets. The fixed prices range from ₹4 for Non-AC cinema halls in municipalities and village panchayats to ₹120 in the AC multiplexes that are contained within shopping malls.

The implementation has helped keep the prices of cinema tickets quite low in the state – ticket prices at multiplexes in comparable metropolis such as Kochi and Bangalore range from ₹300 to ₹500. It is interesting to note that another state which has a strong connect between politics and the film industry, Andhra Pradesh, also have similar laws capping the price of cinema tickets.

But this has come with long term unintended consequences.

Cinema, by its inherent nature, is a very risky industry. Notwithstanding the risks of a movie being completed from the point of inception, there are huge risks on the success of the films that are released (people’s taste, popularity of the stars, novelty of the theme, etc). In such an industry, the model will be to capture increased profits in cases of increased demand (a “Hit” movie) – what finance terms as a “higher-risk-higher-reward” mechanism. The price cap prevents the industry from capturing a higher amount of reward except by way of having cinema on the halls for a longer duration. But video piracy has led to the reduction in the “shelf life” of a new movie.

Investments in developing new and upgrading existing cinema halls have fallen due to high costs of setup and the low returns therein. Moreover, the opportunity cost of land for smaller theatres have increased – due to the increase in land value and stagnation in ticket revenue. Theatres in small towns have put the land for other use – malls, apartments and such.

Most cinemas have looked for alternate sources of revenue – snack and parking fees in multiplexes cost more than the ticket prices themselves! While the cinema tickets themselves are cheap, the cost of the “transaction” of watching a movie is high.

No allowances for inflation-based increases were made in the regulation. While the labour and utility costs have increased with time, the price ceiling have remained constant even after 10 years. The cap has led to continued use of the practice of selling tickets in “black”.

In a separate but related move the government, to boost Tamil language, decided to waive off the entertainment tax for tamil movies with tamil titles. This has led to a situation where the government doesn’t have an interest in increasing the ticket price – as there will be minimal corresponding increase in the tax collection. This tax break and the price cap has meant that the exhibitors of other language movies make lesser revenue per ticket than their Tamil counterparts.

Contrast this with the neighboring state of Kerala. The state laws there do not provide the government with the ability to set prices – only decide on the taxation that can be applied. An open market – same entertainment tax rates regardless of language and content and the ability for the cinemas to be flexible on pricing – has enabled the cinema exhibition industry to grow. The number of screens in the state has increased from 408 in 2014 to 516 by late 2016.

The regulation from the state of Tamil Nadu has helped keep the prices low – much lower than what the consumers were willing to pay (if compared with similar consumers in other states). While consumers have been happy, in the long term this has squeezed the profitability of the cinema exhibition industry. The Madras High Court has recently directed the state government to take a “realistic and rational decision” on ticket pricing.

Is it time for the government to withdraw itself from regulating this industry to its peril?

Natarajan is a alumnus of the Takshashila GCPP, an engineer by education, manager by profession and an aspiring policy analyst out of curiosity (@natrajdr)

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls across the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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Controlling Healthcare Costs in Japan

The Japanese story of achieving low-cost healthcare through price controls

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Japanese Superambulance/Ypy31

By Aneesh Mugulur (@mugulur)

Between 1980 and 1992, Japan’s price controls in the healthcare sector led to the decline of physician fees by 19%. In 1991, Japan’s infant mortality rate was just 0.45% of live births in comparison to the United States of America’s figure of 0.91%, placing it in the top rank amongst industrialised countries. The same year, the average life expectancy at birth was 76.13 years for males and 82.22 years for females, more than the world average.

What was the reason for such impressive status of Japan’s health?

The Japanese government provided universal healthcare to all its citizens and regulated the prices of all care (and continues to do so). The aim of this price control was to provide affordable healthcare and insulate them against the high cost of living due to inflation. In this period, more than 80% of hospitals and clinics were privately owned. However, for-profit hospitals were banned.

How did the price control mechanism work?

Health insurance was mandatory for every citizen. There were three important types of insurance based on sectors; for employees, the self-employed, pensioners and the elderly. The government also fixed the co-payment rate. Claims were supposed to be filed with providers and services were provided in kind. The Ministry of Health, Labour and Welfare provided medical care under a nationally uniform fee schedule.  It is ‘uniform’ because the same fees are paid by all insurers to providers regardless of the experience of the doctor, or whether it is performed in a rural clinic or a multi-speciality hospital. The government strictly controlled the fees scheduled, and neither the insurers nor the providers had any say on it.

While there were marginal differences in rates amongst insurance plans, the physician fee was uniform. Charging more than the prescribed fees schedule had serious repercussions. Hence, there was no incentive for higher quality of service. As a result, doctors and medical practitioners focused more on quantity rather than quality.

Was the objective of low-cost met?

Nationally, uniform fee schedule played a vital role in maintaining equity. It also established both the scope and standard of services. There are further three structural factors that ensured low costs.

  1. The economic incentive embedded in the fee schedule was for testing pharmaceutical products and laboratories test which meant it was mainly for physicians in primary care who could conduct those tests.
  2. Clinics-based physicians did not have patient admitting privileges. Only hospitals could accept patients and their fees were regulated.
  3. Low administrative costs and secure claiming process

According to the Organization for Economic Cooperation and Development (OECD), among the major industrialised nations, Japan’s personal health expenditures were the lowest.

However, there were several unintended consequences which remain unresolved even to this day. Due to the universal fees schedule, a doctor who sees more patients makes more money than a physician who performs long hours of surgery. As the price for each consultation is fixed, doctors make sure they consult more patients to increase their income. In Japan, doctors worked an average of 70.6 hours per week, compared with 51 hours per week in the U.S. Patients have to wait for three hours but their consultation time is just three minutes.

Even though Japan’s healthcare was cheaper compared to most industrialised countries, its quality was dismal. The rigid control did meet the objective of providing affordable healthcare to citizens irrespective of their income. But its unintended consequences were more.

Since Japan’s system provides more incentives to primary care physicians and pays equally to specialists, it has led to an acute shortage of specialists in tertiary care such as surgery, paediatrics, and obstetrics. According to Japan times, the number of maternity wards declined from 4200 in the year 1993 to 3000 in 2005, resulting in longer commutes for pregnant women. Another significant consequence of this government control is the increasing corruption in the system.  In 2004, the chairman of Japan Dental Association was arrested for bribing the members of the government in charge of setting medical care fees.

Will the new ‘Abenomics,’ which is making news globally, revamp the healthcare system of Japan? The question remains unanswered.

Aneesh Mugulur is an alumnus of the Takshashila GCPP15 and tweets at (@mugulur)

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls across the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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Shopping at Supermarkets in Argentina? No, Thanks!

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Image credit: Vauvau, flickr/The Argentina Independent

How the price freeze at supermarkets in Argentina left consumers in an unrelenting dilemma with regard to grocery shopping

By Sreetama Sen (@SenSreetama)

The Argentinian government, under the presidency of Cristina Fernandez de Kirchner in 2013, imposed a strict price control mechanism on necessary goods being sold at larger supermarkets across the country. This action of capping the price is a price freeze scenario, which is similar to a price ceiling, wherein the prices of goods are fixed in such a way that they can’t increase beyond the set limit.

This measure was introduced in the aftermath of the International Monetary Fund (“IMF”) censuring Argentina for providing inaccurate data. Also, we must keep in mind that Argentina’s inflation and hyperinflation woes date back to several years.

In 2013, the official records stated an inflation of around 10.9-11% in Argentina whereas, according to independent analysts, the actual figures were 25-28%. The price control mechanism was implemented by the government to bring down this double-digit inflation rate as well as to protect the interests of consumers by maintaining their standard of living in the short term. Additionally, the supermarkets utilised the already high inflation rates to sell the goods at an even higher rate to the final consumers while they themselves continued to pay six times lesser than the final price to the producers. Hence, this measure was aimed at ensuring that such producers were not at a disadvantage in addition to controlling the soaring inflation rates in the country. Even in recent days, there have been instances of protests by these producers for not being paid the adequate price.

In the initial stages, the government followed a two-pronged action plan – (i) identifying several goods which were daily necessities, including groceries (cooking oil, cereals, beer, etc.); and (ii) capping the prices at which such goods could be sold by large retailers for a period of two months. This period was subsequently extended in phases till Mauricio Macri took over as President in 2015.

By December 2013, the Argentinian government entered into an accord with the popular supermarkets operating in the country like Carrefour SA, Wal-Mart Stores Inc. Cencosud SA, etc. whereby the prices of these goods were frozen for one whole year. During the time when this mechanism operated in Argentina, the number of regulated goods, rose to as many as five hundred. Interestingly, the accord also included an understanding between the parties that such price fixation on goods should not result in shortage of supplies by the supermarkets.

The question that arises now, is whether the inflation rates were actually controlled? Well no, as of 2015, the inflation rate was at 23.5% as per data released by the World Bank. Secondly, the effect on consumers was also undesirable. This mainly happened because the supermarkets found a way to counter the fixed price by displaying lesser supply of those goods and in turn, the smaller sellers, due to a rise in demand also raised the prices of those goods – hence demand for the particular good kept increasing for the consumer and yet he/she was unable to purchase it because the supply was considerably reduced, artificially or by market forces. As a result, the producers were not getting paid for sales, and thus, were unable to produce any good due to lack of capital.

So, why is any of this still baffling, considering that the IMF has lifted the censure on the country in November, 2016? Here is why:

The first and foremost unintended consequence was a deficit in the supply of the goods – whole point of fixing the prices was because they were ‘necessary’ goods and yet consumers found it difficult to purchase the same items. The smaller vendors, taking advantage of the fact that supermarkets were unwilling to sell these items, further increased the prices of those items, leaving consumers in a limbo. It also resulted in black marketing of such goods, catering only to those consumers who could afford to pay higher costs to meet their demands.

The intended recipients did not receive the intended benefits of this price control mechanism. It most definitely did not achieve what it set out to achieve. But, what is even more surprising is that, three years and a government change later, the condition in Argentina is not very different. This is important because – it is one thing to know that a control mechanism did not work and it is another to see the same control being removed and yet the same issues still persisting. The recent proposal by the legislators in Argentina in relation to regulation of prices in supermarkets in Argentina to curb rising prices and inflation rates is that there needs to be a law that governs this sector and a law that is passed after due consultation with all stakeholders.

Thus, it remains to be seen whether the extremely high double digit inflation rates in the country is a consequence of continuous economic mismanagement by the authorities or misplaced causation by the stakeholders.

Sreetama Sen is an alumna of the Takshashila GCPP15 and tweets at @SenSreetama

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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Regulating Fintech: A Proactive Approach

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Image courtesy of Forbes

By Nitin Malik (@nitinmalik86)

Financial Technology or Fintech sector needs a proactive and stable financial regulation policy environment to grow. Fintech can have a potentially transformative impact on economy in the future, and as such, Indian regulators need to carefully nurture a policy regime which promotes innovation and growth of fintech companies.

Fintech encompasses a broad range of technological innovations in the areas of block chain, financial advisory, digital currency, payments, financial inclusion, peer to peer lending, among others, which are disrupting traditional financial services. Not only do fintech innovations increase efficiency and lower costs, they also help increase access to financial services. For example, innovations like P2p and social data based lending is enabling people without formal credit histories to get faster and easy access to loans. In Kenya, M-Shwari uses call data and recharge history of customers to determine their credit worthiness. This has made it possible for millions of mobile subscribers to get loans in just a few minutes.

The Indian Fintech sector is estimated to be $1.2 billion in 2015 and is projected to touch $2.4 billion by year 2020, as per a NASSCOM study. Globally the sector is estimated to touch $45 billion by 2020. A recent McKinsey study estimated that digital financial services can help governments in developing countries to save around $110 billion annually.

Why regulating fintech is different?

Rapid innovations in fintech sector makes it a difficult sector to regulate. The objective of Fintech firms is to disrupt banking and financial services which are traditionally heavily regulated. Sometimes these regulatory costs create high capital requirements on startup firms and pose barriers to innovation in the initial growth phases.

This is why regulations of fintech is so critical, one that enables and not stifles innovation. Globally, regulators have had to walk a thin line between over and under regulation. Since understanding of risks posed by fintech firms is limited, regulators have come up with different approaches to understand and regulate this sector. Countries like UK, Singapore, the US and Australia have been at the forefront of these regulatory innovations.

How others are doing it?

UK’s Financial Conduct Authority and Monetary Authority of Singapore have created regulatory sandboxes for fintech firms. These sandboxes are like contained experiments, where fintech firms are allowed to innovate without the burden of regulatory permissions. FCA in UK through its project innovate scheme has invited fintech firms to innovate. These firms are provided with regulatory feedback and a safe house to build on their innovations and experiments.

Another approach, advocated by Omidyar Network, is the minimal approach to regulations called lean regulation – a term borrowed from the lean startup philosophy by Eric Ries. The spectacular growth of Kenya’s M-PESA and Philippines’ GCash mobile money services owe a lot to minimal regulations in the initial stages by central banks. Under the lean approach, regulators collaborate with players in their incubation phase and keep the regulatory requirements to a minimum. Rules are developed gradually as the market matures and there is better understanding of risks involved. This approach has proved highly successful for both countries, as they have become global leaders in providing mobile financial services to their citizens.

Recently, PayPal has also come with a paper on performance based standards for regulating payments industry. It advocates setting smart governance models by governments using data analytics and feedback loops to advance payment business models. This is still at ideation stage.

In summary, the overall arc of regulations should move from a rule based approach to principles based approach. Regulators should be active participants in market development rather than bystanders. They should encourage pilots, trials of innovations and engage with both incumbent players like banks, NBCFs and new startups.

India can spearhead the change

In last few years, India has taken a lead in emerging markets in embracing financially innovative regulations and policies, especially in finding innovative ways to promote financial inclusion. Despite this, we still don’t have pervasive mobile money services for the poor like Kenya and other east African countries. But the government along with RBI has been proactive with initiatives like award of differentiated banking licenses, development of India Stack, unified Payments Interface and laying out of JAM architecture. RBI has even issued a paper on P2P lending providing much needed clarity to the regulatory grey area.

India’s traditional software strengths and large internet consumer market places it an optimum position to be a leader in fintech sector globally. It is important that RBI, SEBI and other regulators continue to embrace the growth of fintech and make India a global hub of fintech innovation.

Nitin Malik is a financial inclusion consultant working in Myanmar and a participant of the 14th cohort of the Takshashila GCPP. His twitter handle is @nitinmalik86

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