Friday, January 11, 2008

Free Market and TATA NANO

Its finally here. The (mental ?) barrier is broken. A car at an astonishingly low price. And we are not talking about a cart with 4 wheels and an engine, Nano is a car in most conventional sense. But it is facing some serious criticism.
  • Nano will create congestion on Indian roads
  • Pollution levels are going to hit all time high
  • Low safety (International) standards
Some blunt assumptions have been made to arrive at the above points. First of all, the critiques believe that Nano is going to be so popular due to its low price that every Tanu, Dinesh and Hari will buy this car. I would say - let the market decide. I am sure the competition is also gearing up to produce low price cars, and India being a free market (sort of), car manufacturers are free to produce cars which they think the consumers are willing to buy. At the same time, the consumers are free to buy whatever car they can afford. Indian economy is booming, the people are getting richer. People will upgrade their standards of living. A family with small car will upgrade to a mid size car. What do the critiques have to say about that?

Second point is that road congestion is not a problem of a car manufacturer. Its the responsibility of the govt to provide better infrastructure. In the absence of mass transit systems, people are forced to arrange for their commute. Also Ratan Tata, the Chairman of TATA group has made a press statement that the TATA's do not have the resources to create the kind of congestion the critiques are taking about. The economic principles are evident here too. The raw materials - steel, plastic, rubber etc - required for a car are limited in terms of the availability. The alternate uses of these materials will determine the net availability of these to the car manufactures.

Lets say that the increased number of Nanos on roads does create a traffic problem. In such a case following outcomes are possible. The govt would be further pressurized to a) create more roads b) build mass transit systems c) develop suburbs. But these things do not happen overnight. What could gradually happen is that the demand for cars such as Nonos would fall. People could follow the western methods like car-pooling.

To conclude, whatever the situation might turn out to be, as long as the govt "does not" intervene to control the car manufacturing, the invisible hand of the free market will lead us to a solution.

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