Haldiram’s is perhaps the only brand known around the world which comes from Nagpur (my home town). They make a great variety of wonderful namkeens (traditional Indian salty snacks), sweets, and other stuff which can be lumped as Indian junk food. It may be my cultural chauvinism which is speaking but I think that Indian junk food (like Indian food in general) beats any other variety of junk food hands down.

Haldiram’s is good Indian stuff. I used to pack my suitcases full of the stuff every time I returned to California from a visit to India. I exported the stuff to myself, so to speak.

While opening a pack of Haldiram’s Bikaneri bhujia last evening, I noticed the packet proclaimed “Export Quality!” I suppose they meant “Best Quality” or “First Quality” because it could not have meant “Basically Inferior Stuff”. The label implied very clearly that this stuff was good enough to be exported. That implication arose from a shared assumption that is very disturbing if one thinks about it.

The shared assumption essentially was that the domestic market is not discriminating enough and can be sold sub-standard stuff; that export markets demand and deserve quality better than the domestic market. Was the assumption justified? If so, is the Indian consumer inherently incapable of recognizing quality? Or is the Indian consumer not “deserving” of quality? Or is it that the Indian consumer cannot afford quality? What are the reasons why the market delivers poor quality shoddy goods and services in India?

It is undeniable that the Indian market does deliver very poor quality goods and services in general. The explanation for that is really very simple: it is a sellers’ market. The essential characteristics of sellers’ market are that there is insufficient competition on the supply side, and the supply is severely constrained which leads to intense competition for goods on the demand side. The sellers don’t have to compete for customers, while the buyers have to compete for the goods.

Why the supply constraint? In some cases it is due to public sector monopoly, such as the railways (and until recently, telecommunications.) In some other cases, license restrictions on the private sector coupled with import restrictions. I recall a time when being able to get a two-wheeler was an achievement because the waiting time was of the order of a few years.

Monopolies, public and private, do not fear competition and behave exactly as the textbooks say: high prices, shoddy quality, and super-normal profits (economic rents.) Also, as any economics textbook analysis would demonstrate, deadweight social losses.

Somewhat similar outcomes obtain from putting license restrictions on private sector suppliers of anything from two-wheelers to cement. By limiting the number of firms allowed to operate within a certain sector, the policy makers essentially limit competition within the market. With limited competition in the market comes supra-normal profits (economic rents) and this rent can be captured by the policy makers. How? By handing out licenses to those firms which are willing to pay the most to service the market. Essentially, the competition for the market replaces competition in the market. Sometimes the licenses are auctioned off publicly (as in the case for telecom firms), and sometimes it is pure and simple corruption. It is well-known that Indian government officials and politicians in charge of various commodities such as cement, steel, etc., make hundreds of millions of dollars (which they stash away in Swiss banks) from handing out licenses. In either case, supply is limited, competition is curbed, prices are high, quality is poor, and leads to deadweight losses.

Add a few thousand billion rupees of deadweight loss here and a few thousand billion rupees of dwl there, and soon you will be talking real poverty. The combined effect of these losses aggregated over many years and you have the prescription for an emaciated impoverished economy. The Nehruvian socialistic system of controlling the economy to extract as much rent as possible is at the root of India’s eye-popping poverty.

When we say India is poor, we mean that the people of India are poor. The poor have little and therefore they ask for more, never mind the quality; the rich have a lot and demand better. The poor are willing to take what they can get their hands on to, by hook or by crook. The rich have the luxury of rejecting stuff that don’t meet their standards. You can get “Export Rejects” in shops in India and these are sold as better stuff than the stuff available for the domestic markets.

Export quality for a poor nation means it is better than the stuff that domestic consumers can get or even afford. Export quality for rich nations could mean something entirely different. The US, for instance, sometimes exports stuff that it considers below par (such as food and military equipment to third world countries). In some cases, it exports stuff that they are legally barred from consuming in the domestic market because of health and safety issues.

So back to the question of whether the Indian consumer “deserves” quality? Well everyone deserves good stuff as much as the next guy. But Indian consumers cannot afford quality because the quantity is restricted. Quantity limitation is a comparative characteristic, not an absolute characteristic. It is only in comparison to some quantity is it meaningful to talk of another quantity being limited. In the Indian context, the quantity restriction arise primarily in comparison between the quantity of goods and services produced to the quantity of people.

India has over a 1,000,000,000 people and every year about 20,000,000 are added remorselessly. Does not matter what you goods or services you produce, someone is there to take it, sub-standard or not because there are few alternatives. Beggars cannot be choosers and Nehruvian socialism has reduced the majority of us to beggary.

The relationship between quantity supplied and demanded, and quality is absolutely clear and rigid. High demand and relatively inelastic supply invariably results in poor quality in goods and services. This means for the domestic market to produce high quality, the supply has to increase, which implies increased competition. We have already seen it in various sectors, such as telecommunications, air travel, passenger cars, etc.

Coming back to Haldiram’s. In the snack and sweets market in India, it is a buyers’ market mostly. Haldiram’s competed in that market with higher quality. They brought in world-class packaging and marketing. This allowed Haldiram’s to expand its operations outside India as well.

The lesson is really very clear. For India to produce world class goods, firms in the domestic market have to be exposed to competition at home. Firms then grow up and learn how to produce quality. Then they can take on enter global markets. By limiting competition at home, the Nehruvian socialist policies crippled Indian industry and guaranteed dismal economic performance of about 2 to 3 percent annual GDP growth which we shall call the “Nehruvian Growth Rate.”

In my considered opinion, the worst effect of Nehruvian policies have been in the education sector. That is what I will turn my attention to the next time. Until then, enjoy the dismal quality if you are in India and raise a glass to the one responsible for it.