Counter-productive controls

Private trade could be an ally in fighting inflation

The Cabinet’s decision to extend by a year the stock limits and other controls on the private trade in rice, pulses, edible oils and sugar, perpetuates a regime that has proved ineffectual in reining in food inflation. Restraints on the commodity trade have been in place since August 2006, when the enforcement of an earlier notification of February 2002 that allowed licence- and controls-free trading was held in abeyance. Futures trading in several items of mass consumption has also been suspended though, in cases like wheat, also reintroduced. None of these measures has checked the rise in food prices. While general inflation has disappeared after peaking in 2008, double-digit food price inflation has continued.

The stock ceilings may even have restricted the availability of essential commodities, rather than improving it, and thus fanned food inflation instead of dousing it. Besides, these curbs have created problems for food-based industry in planning their raw material inventories. Some states have fixed ceilings unrealistically, making it hard even for licensed wholesalers to conduct their normal day-to-day business. In the case of sugar, a tight time frame has been prescribed for inventory rotation, apart from low stock ceilings. Bizarrely, bulk sugar consumers like confectionary and soft drink units are required to produce chartered accountants’ certificates even if they have inventories equivalent to just 15 days’ requirement. Instances have come to light where ‘notices’ were served and raids conducted on food and beverage companies under the draconian Essential Commodities Act.

Instead of striking at the root causes of food price inflation, which are basically supply-side factors, the government is barking up the wrong tree by holding hoarding responsible for price increases. Raids carried out in various states have failed to unearth any big quantities of hoarded stocks. In the case of commodities such as rice, wheat and pulses, the government itself has proved to be the biggest hoarder. As of July 1, the official grain coffers were brimming over with a massive stockpile of 53 million tonnes of rice and wheat, twice as much as required under buffer stocking norms. The bulk of the post-harvest market arrivals of these grains, over 95 per cent in the case of wheat, was mopped up by government agencies, leaving insufficient stocks in the rest of the system. In the case of pulses, only three public sector firms have been allowed to import at zero duty. Similar facilities, if extended to the private trade, might have achieved better results. The government needs to revisit its knee-jerk responses to a price problem, and see if allowing markets to function normally delivers better results. The need also is for a long-term policy to boost the domestic output of essential items. Otherwise, food price inflation will keep returning as a problem.