The Hindu Business Line : Address issues, don't play the blame game

Predictably, the blame-game has begun. For the sticky problems faced by the UPA Government on the price front — shortage of essential commodities, hoarding, speculation, inflation — and the resultant flak from political allies, media and consumers, the Congress has found an explanation — the policies of the previous Government.

It is well known that in a broad sense, there is little difference between the Congress and the Bharatiya Janata Party insofar as economic policies are concerned. Both stand for economic liberalisation and market reforms.

The present Government had two long years to review and, if needed, reverse the decisions of the previous Government; but did nothing. The latter had liberalised the commodity market and diluted the Essential Commodities Act.

A case is now sought to be made against the dilution of Essential Commodities Act and introduction of commodity futures trading. Many in the Congress seem to attribute the present troubles to previous reforms.

The Prime Minister has an unenviable task. He has to ensure that the prices of essential food items (wheat, sugar, pulses) are reined-in, but without having to bring back controls and restrictions. Re-imposition of controls would surely not advance the pro-reform image of either the PM or the party he belongs to.

The most unfortunate part is policymakers in recent years failed to see the bigger picture and failed to adequately nuance their response to emerging situations.

Removal of controls and restrictions on marketing of agricultural crops was meant to infuse the market with greater efficiency, improve the marketability of crops and help growers have greater market access. Removal of trade restrictions — storage, movement, licensing and credit access — was intended to bring competition, efficient supply chain and consequent benefits to consumers.

However, in effect, nothing significant happened. As far as agriculture is concerned, removal of marketing restrictions can never be a successful standalone reform programme. Removing trade-related restriction is like plucking a low-hanging fruit — accomplished without effort.

In an economy with chronic shortages, continuing State-control on some commodities and illiberal foreign trade, production processes have to be liberalised first. Conditions for raising production in accordance with rising demand have to be put in place. Marketing reforms have to be undertaken in tandem with reforms in production.

Without strengthening the production base, creating genuine surpluses and empowering primary producers, the policymakers have given freedom to trade.

Shortages, by their very nature, breed speculative tendencies. Too much money starts chasing limited supplies of essential commodities.

Now, instead of addressing the fundamental issue, that is raising domestic production and controlling unlimited flow of speculative funds into essential commodities, the present Government is trying to find a scapegoat.

Worse, this Government has also been talking about allowing more and more funds to flow into the commodity market.

Senior officials are on record that banks, mutual funds and foreign institutional investors would soon be allowed to trade commodities. This is the last thing that India's commodity market, given its fragility, needs.

At the recent meeting of Congress chief ministers, a strong pitch against commodity futures trading was made. Just like it is foolhardy to expect futures trading to be the panacea for all the ills of the commodity market, it is inappropriate to blame futures trading alone for the present price rise.

Indeed, the economy is facing real shortages. Wheat output has stagnated for the last six years. Pulses production has not expanded commensurate with demand increases. Sugar production has just about recovered this year after two years of production shortfall.

On the other hand, demand for food products has been rising with robust growth - rising income and rising population. No wonder, demand-supply mismatch is becoming endemic. Shortages when not recognised in advance and not augmented through imports manifest themselves in higher prices.

Indeed, the price situation should be construed as the failure of the Government to read market signals or assess emerging market conditions. But, to be sure, while shortages lead to higher prices, the question is whether the extent of shortage at present warrants the current level of prices.

There is surely some merit in the belief that futures trading has pushed up the prices of essential food items beyond what market fundamentals would dictate. Today, all and sundry are trading commodity futures.

Those who cannot tell coffeebean from soyabean or cottonseed from castorseed buy and sell large volumes. Margin trading allows tremendous leverage.

There is very little hedging in the bourses and too much of speculative trading. Obviously, ways and means to curb excessive speculation have to be found. The Government has so far been unequal to the task.

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