Big Bang vs Tinkering

The Indian government has been reducing the subsidy on fossil fuels a little at a time over the years.  Each time there is a tiny cut in the subsidy, there are angry protests accompanied by strikes and stoppage of public transport. Destruction of public property by protesters is not uncommon in some places.

The media report that the government is planning to withdraw the subsidy completely and allow domestic fuel prices to float with international prices. Having decided to eliminate subsidy, what strategy should the government adopt to persuade the public to accept it? It has two broad options: follow the existing practice of gradual reduction until full elimination in a few years or remove the subsidy at one go. Which is the better option?

If every price rise is accompanied by protests and strikes, isn’t it better to have a big price rise that removes the problem permanently? The protests should die down after a while just as they do after every small increase.

Let me stick my neck out and say that the policy of a gradual withdrawal of subsidies is superior to a sudden, single-stroke withdrawal in getting the buy-in of the public. Here is my reasoning.

We take small changes and shocks in our stride. We quickly adjust ourselves to the changed environment, which then becomes the default. Although it is true that every price rise provokes public protests, it is rarely that the government is forced to roll it back. The protests lose steam quickly because the vast majority of the public is not badly thrown off balance by a minor change. They may be extra cautious for a few days in the use of fuels and then fall back to their old ways.

If, however, the change is massive, the public response will be very different. A larger number of people would actively join the protests because they will all be deeply affected by the big jump in direct and indirect expenses. The government may be forced to roll back the price increase. It may even fall.

The only context in which a major change for the worse is accepted is when there is a palpable crisis. The year 1991 was one such for India. When it suffered the indignity of having to take gold to London and pawn it there to borrow money, the country became ready to embrace big changes in the way it was managing itself. In the absence of a perceived crisis, attempts at major changes are almost certain to fail especially when they affect a large number of people.

Companies know this very well and increase prices in a way that people don’t notice. When they want to raise the price in a competitive situation, for example, occasionally they retain the price and external dimensions of the pack but reduce the weight or the volume of the contents slightly. It is rarely that consumers check whether a familiar pack contains 350 g or 375 g.  I am reminded of the way American Airlines is said to have saved $40,000 a year by removing just one olive from every plate of salad it was serving on its flights in 1987. Apparently no one noticed the change until the story came out much later.

Are you aware of any big bang corporate change strategies? How did they fare?