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No free lunches

The government's claim in the Economic Survey that the average thali has become more affordable is untenable

The most talked-about chapter in this year's Economic Survey tries to attempt precisely what this column also aspires to - bring out how economics affects everyday life. The chapter is called 'Thalinomics: The Economics of a Plate of Food in India'. The analysis covers the period from the financial year 2006-07 to 2019-20 (April-October 2019).

The main idea seems borrowed from what's come to be called Burgernomics. The Economist had launched the Big Mac Index in 1986 that calculates how many units of a country's currency are needed to purchase a Big Mac in that country.

Measuring the disparities in consumer purchasing power across countries is easier now. It can be done by contrasting the prices of a McDonald's Big Mac in each country - in local currencies, of course. The average baskets of groceries in different countries are likely to contain very different products. The American basket will not look like the Japanese one. But, outside of slight local differences in ingredients, a Big Mac is always a Big Mac.

The index has proved to be useful. The Economist used it to confirm economists' misgivings about Argentina's official consumer-price data understating its rate of inflation between 2010 and 2012. The country's official rate of inflation in January 2011 was 10 per cent, lower than the average annual rate of burger inflation, which was 19 per cent. Analysts have used the index to work out the number of hours that an average worker must work in different countries to earn enough to buy a Big Mac.

Thalinomics has a similar ambition. The Economic Survey's authors write that it's an attempt to quantify the cost of a thali and find out if a plate of food has become more affordable or less. They have compared inflation in the price of a vegetarian thali with that for a non-vegetarian one. Using indices similar to the Big Mac Index, they calculate how prices in any state change relative to how prices move in other states.

Just as prosperity and income aren't the same thing, cost and affordability are different concepts. How affordable a nutritious meal is does not depend only on its cost. For that, we must have a fair idea about people's incomes and purchasing power and how these have changed. The Survey's authors tackle this problem by using daily wages data of industrial workers.

The main conclusion of the entire exercise is that the thali has become more affordable - while the gains for vegetarian families are about Rs 10,887 a year, non-vegetarian households saved Rs 11,787 a year.

How many families will agree with this? We have some idea about the answer because at the aggregate level, the economy as a whole is not spending or investing all that more than before. Consumer goods aren't flying off the shelves. In fact, companies that make consumer goods say people have cut back their spending on soaps and biscuits, etc. Airlines and other services companies haven't reported a big rise in sales either. So what is happening to the savings accruing from more affordable meals - if they are more affordable? Thalinomics has not answered this question.

The answer may lie in how market prices of food get built up. A bumper crop lowers market prices because the government does not lift controls on exports soon enough. The especially incompetent ones forget to halt imports in time, leading to gluts and even lower market prices. The excess supplies are supposed to be sucked out through the procurement mechanism, but that system also does not function smoothly. The result of the wholesale incompetence is that market prices get depressed, resulting in Thalinomicstype findings with which governments flatter themselves.

But depressed market prices mean unremunerative farm incomes, rural distress and all the stuff that gives politicians nightmares. To fix this, governments then transfer tax money to farmers in form of subsidised electricity, fertilisers and loans and now even cash. Who foots the bill? Taxpayers. From matchboxes to gold, the government taxes just about everything. Shouldn't Thalinomics add these costs to the price of a meal? It will be interesting to see how it will change the affordability of thalis.

What of the cost of depleting ground water and air pollution due to stubble-burning? The money that families living in the areas vulnerable to air pollution spend on air-purifiers could be spent on something else - more ice creams or sweatshirts or an extra mutual fund SIP.

In life, and in economics, there's no such thing as a free lunch. Economic resources are scarce. If one set of people gets more of one resource, less will be available for the rest. This scarcity forces trade-offs in the economy. A family that sends its children to less-affordable private schools rather than government schools has to sacrifice a vacation or living in a larger home or owning a car.

This concept of opportunity cost is fundamental to everything in economics. A farmer's decision to grow potatoes can sometimes mean lost opportunity of producing more profitable crops such as medicinal herbs. Same for factories.

Governments wrestle with these dilemmas all the time: whether to allocate the limited tax money to education, health, public transport or a sop that could change the outcome of the next election in their favour. But they rarely calculate the opportunity costs of their decisions.

The concept of opportunity cost is best understood by those who value time. We don't pay, other than for the broadband used, for browsing on the internet. But doesn't the cost include the value of our time, which could have been invested or spent better for richer returns to us? Time is money.

Media, entertainment, retail, all companies want our time. They want us to spend ever more time with our devices. Free markets value more what is in short supply. Attention is scarce. So companies use algorithms to trick us into spending more time on their websites. That increases advertising and all sorts of revenues for them as attention converts into engagement and shopping. Media resorts to click-bait just as companies earlier looked for habit-forming products such as wafers and cigarettes.

That brings us to the question of the opportunity cost of the inputs that go into producing food. To produce 1 kg of rice, on an average, 4,000 litres of water is required. Packaged water sells for Rs 20 a litre. Even if the value of ground water is taken as half of that, producing a kg of rice adds substantially to the cost of food that Thalinomics remains oblivious to. How affordable is the thali then? For how much longer?

Puja Mehra is a Delhi-based journalist and the author of The Lost Decade 2008-18: How the India Growth Story Devolved into Growth Without a Story.