Was Finance Minister P Chidambaram wrong in urging companies to slash prices to overcome depressed demand?

By the industry reaction, it appeared so. Corporate executives and most others dismissed it as unfeasible and the CEO of DLF, a real estate company that is bearing the brunt of the economic slowdown, sought lower interest rates, as if that would encourage buyers into putting up tons of cash to buy at highly inflated asset values.

I thought Chidambaram was perfectly right in asking industry to cut prices, though one would still think this is such elementary economics that battle-hardened CEOs didn’t need an Economics 101 from the FM. The problem is, corporate executives are all looking desperately to the government for help, any help. A fallout of this, I fear, is that many are not fully evaluating the free market options available to them and unwilling to go cut prices.

In ordinary times, lowering prices might have been difficult, but not in the current scenario. Commodity prices have plummeted since the global financial crisis ballooned, and as has global crude oil. Consequently, input costs have sharply declined and in many industries, it should be possible to lower prices.

But first, and foremost, the government must lower the price of oil and Chidambaram must show the way because both Prime Minister Manmohan Singh and Oil Minister Murli Deora have dithered.

First, Deora indicated fuel prices could be lowered if crude oil price reached $67 a barrel, but later vacillated because it was associated with a sharp rise in the dollar. Then he suggested $61 a barrel as a benchmark. That has come and gone, and we now have the prime minister saying the oil companies will have to wipe out their losses before he would consider any such move.

This is not just bad economics when governments in the bastions of capitalism are pouring money to rescue the broader economy. There is no worse time to take this ostrich-like stand, and in the same vein, no better time to lower the price of oil and give the economy one big kick in the pants, besides any stimulus being planned.