Case for Cost Reduction

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Case for Cost Reduction

Government controls in various sectors of the economy have resulted in a continuous rise in the prices of essential goods and services. The irony of the situation is that it has benefited neither the consumers who expect prices to remain steady or come down, nor the producers who expect their profits to go up or remain constant.

The reason is simple. Consumers are not happy because every time there is a government announcement with those seemingly innocuous words such as “price adjustment”, it invariably means a price increase that eventually hits consumers’ pockets. And the producers are not happy because the increase is allowed to happen only after a lapse of time during which the producers have already suffered accumulated losses and by the time the prices are adjusted to accommodate the increase, it is not enough because the costs have further increased by that time.

Such anomalies need to be corrected. That means reversing the approach and reducing costs for producers. That is what businesses do themselves in sectors where there is competition and no price control by the government. They go for price increases only when all other efforts for cost control are exhausted.

In sectors where the government similarly controls consumer prices, these costs are also controlled by the government in most cases. Take the example of the dairy industry. The government controls not only the price of the processed milk that consumers buy, but also the raw milk that the dairy industry buys from the farmers. And the prices the dairy farmers pay for inputs such as feed, supplements, medicines etc are again controlled by the government. That means, the blame for any increase in costs and prices in such sectors lies entirely with the government.

Costs can be reduced in various ways. Two methods are worth focusing on from a policy perspective. One, reducing the cost of the inputs by various methods such as reducing the import duties, providing subsidies and encouraging indigenous production of such inputs. The second is to encourage the producers to search for other ways to reduce the costs. The present system in relation to price control is not doing enough to encourage them to reduce their costs as they know that if they lobby strongly for an increase in the price of their products their profits are ensured. So why should they bother to reduce costs?
Let’s take the example of the dairy industry and dairy farming again. The production method in dairy farming is costly because a lot of inputs have to be purchased, such as feed, supplements and medicines. Opportunities in reducing the cost of feed exist in two areas.

One is developing methods in which the animals subsist more on grass so that the requirement for grain-based feed is reduced. And there are varieties of grass that are good for even the imported species of animals. This method can be very effective in the case of farmers who also own good amounts of land or have public grazing areas available in the vicinity. This is true in the case of villages, though not in the case of animal farming in the cramped spaces of urban areas.

The dairy industrialists can be encouraged in various ways to encourage the farmers linked with them to adopt such methods. Enlisting the participation of the dairy industries has helped to achieve good results in providing banking services to dairy farmers. That experience can be replicated also in this case with some modifications.

The other is encouraging the country’s feed manufacturers to use locally available food-grains and other inputs in producing the feed. At present, almost all the food-grains used in feed production are imported and the international market for food-grains is susceptible to frequent price fluctuations. Feed prices are notoriously sticky. Once they go up, they remain there even when the raw material prices go down for some time.

Madan Lamsal
[email protected]

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