Dynamic Effects of Price Controls and Deregulation Policies:
Evidence from the Indian Cement Industry
(with Sagar Saxena)
Price controls are common in critical industries in developing countries. Deregulation is challenging due to rapid increase in prices during the transition out of controls, spurring economic and political disruptions. How do these price controls impact the long-run development of an industry? Should price-controlled industries be deregulated swiftly or gradually? We study these questions in the context of the Indian cement industry which was subject to price controls until the early 1980s, and then gradually liberalized between 1982 and 1989. To evaluate these price controls and the gradual decontrol policy, we develop a non-stationary, dynamic, oligopolistic model of production and investment, and estimate it using plant-level
data on cement output and capacity. The estimates show that price controls had a significant impact on the size of the industry; in their absence, the industry would have had three times the capacity it had in 1980. A comparison of swift or “big-bang” with a gradual deregulation policy indicates negligible differences in consumer welfare as well as in the growth trajectory of the industry post-1982.