Wrong targets

Given the tough time it is having on the issue of inflation, the government is likely to take some action. Two potentially misdirected steps have been mentioned: allowing the states more freedom in applying the Essential Commodities Act (ECA), and curbing the fledgling futures trade in farm produce since there is a view that futures push up spot prices. Both moves involve going back to the old control raj, even as inflation levels are quite benign except in a couple of products. The increase registered by the wholesale price index is under 5 per cent, and that in primary articles is at a still manageable 7 per cent. At the retail level, government data show that rice prices rose 7.7 per cent over the last year and wheat by 11.1 per cent, while pulses rose 26 per cent and tomatoes 25 per cent.

The last two numbers are high, but it is important to find the right correctives. Thus, while India's population rose by about 65 per cent in the last three decades, pulses production today is the same as it was in 1976; it doesn't help that there has been a global shortage as well. Similarly in wheat, even without looking at the impact of consumers moving from coarse grains, production is the same as it was a decade ago while the population has increased 17 per cent. So, if all other things are constant, spot prices should be expected to rise in keeping with global trends, and it is futile to think that the Essential Commodities Act can change the demand-supply equation.

As for futures trading, while there have been instances of rampant manipulation, such as in the case of urad in January, there is evidence to show that it is spot prices that influence futures, not the other way round. Indeed, while spot wheat prices have been rising steadily since April, wheat futures (for July till December) showed no definite trend. When the government, on June 21, decided to allow private sector wheat imports at concessional duties, the spot price fell by just a little over 1 per cent, but futures fell by 6-7 per cent as the market anticipated high imports in the coming months""indeed, even urad futures are now ruling below spot prices.

The important issue here is the way in which exchanges are run, to curb manipulation. Right now, for instance, no exchange member can have an "outstanding interest" (that is a firm order to buy/sell in the future) of more than 1 per cent of the production of any farm produce, and this is dramatically lower for the immediate month before settlement, so as to lower the influence on prices. In any case, the total "outstanding interest" in July was a mere 0.51 per cent for wheat, 0.54 per cent for sugar and 4.77 per cent in the case of chana. These limits, as well as trading margins, are changed on a dynamic basis by both the regulators and the exchanges in order to prevent manipulation. Any attempts to curb trading would not just increase price volatility, which has declined dramatically after futures trading began, they will also lower the increased shares farmers are getting of the market price. Finally, given the 20-25 per cent wastage that takes place in most farm produce in the absence of a well-developed supply chain, from farm-to-fork, it is obvious that large-format retail chains are an essential component of any anti-inflationary policy.