Friday, December 3, 2010

Fat Tax?

A recent study puts 68% of adult Americans either overweight or obese. While India would be far behind the US on this health issue, it is natural that with economic growth, we will move in the same direction. The health hazards and their related social costs are well documented - but what does not seem to be very clear is: is it a problem that can be solved? In other words, can the markets or the governments come up with a combination of regulations and incentives to nudge people in the right direction in terms of nutritional choices?

To me, this appears to be one case where both the markets and the governments will be unable to do anything substantial. This is clearly a situation of market failure, mostly since it is pretty much impossible to factor in all the negative externalities related to health hazards from unhealthy food. There is a similar parallel that does exist in the tobacco and liquor industries - but with two fundamental differences. Firstly, there is broad acceptance on the negative consequences of tobacco and liquor. Secondly, both tobacco and liquor are not 'mass consumption' items. Both of these factors make it relatively easier for governments to tax them, as a proxy for pricing their negative externalities (side note: it is interesting that most governments do not label these taxes as 'health hazard taxes').

When it comes to food, however, the situation is far murkier. To begin with, humans seem to have a deep, personal connection with food - one that comes in the way of making rational choices. Which is probably why the existing regulations mandating the printing of nutritional data has not meant much, apart from increasing the actual cost of the product. This is even more so in India where there do not seem to be any standards on reporting nutrition information (e.g. most products do NOT carry the fat content as a % of recommended daily diet). Add to that the fact that packaged foods are but a tiny percentage of food consumption in India and most of the food consumption is freshly prepared food from ingredients (typically home-cooked). This makes it even harder to devise economic mechanisms to influence behavior. For instance, imposing a 'fat tax' on cooking oil seems like a non-starter, and in any case, the neighbourhood mithaiwala is outside the ambit of the formal economy - which essentially closes out the option of imposing a similar tax on sweets/samosas (!)

And so this brings us to the only possible solution - that of educating people to make healthy choices when it comes to food, which mostly consists of laying off unhealthy foods - easier said than done, given that most of the food consumed in any occasion is an exercise in maximizing the consumption of fat, sugar and cholestrol! And given this 'deep emotional bond' that we have with food, it is not very clear how effective an education initiave would be. And this situation is likely to worsen as incomes rise - India is already ranked 2nd in the number of diabetics (behind China, of course).