Restrictions improve grain management

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Inflation may touch 10% by end MarchInflation up at 0.83% on higher food pricesHoarding drives food inflation by 16.32%Inflation a matter of concern: FM

: In the wake of the recent spike in food prices, the limited policy responses have actually accentuated price volatility. Soaring prices now threaten to push a large segment of the population back below the poverty line in India. A combination of structural and adverse cyclical forces has put food prices on an upward trajectory and given the present circumstances, it looks as if the upward spiral will not end soon.

A liberal trading environment, with traders having complete freedom to take advantage of ever-increasing demand and scarcity, would lead to severe consequences. In this context, the recent decision by the central government to extend the scope of quantity restrictions on the trade of major cereals like wheat and pulses, and the addition of paddy to that list, is a push for government control over open markets to arrest rising prices.

The decision to extend by another eight months to April 2009 the power of state governments to fix stock limits of wheat and pulses that traders can hold seems appropriate, even though industry sources claim that the restrictions are meant to facilitate meeting the government’s paddy procurement targets. On February 2, the Centre had issued a notification for a storage control order under the Essential Commodities Act (ECA), 1955, fixing the limits of storage for wheat and pulses. The central order was valid for six months. But no restriction was placed on inter-state movement, neither was licensing introduced.

The ECA is a major piece of legislation from which most of the restrictions on movement and storage on private traders emanate. In 2002-03, the government attempted to remove the controls on farm produce that emanate from the ECA. By this order, any dealer could freely buy, stock, sell, transport, distribute, dispose, acquire, use or consume any quantity of wheat, paddy/rice. In addition, issue of any control order by the states under the delegated powers for regulating by licenses, permits or otherwise, the storage, transport, distribution, etc of the specified commodities would require prior concurrence of the central government.

The current set of restrictions for better grain management finds rationale as WPI-based inflation has been climbing due to increases in fuel & power group and primary products. A prognosis of the price increase of primary products reveals that the present crisis is not entirely triggered by a sudden slump in production. In fact, grain output has increased in 2007, over the previous year, but public stocks are low.

More importantly, food has transformed from something that nourishes and provides secure livelihoods into a commodity for speculation and bargaining, with markets becoming integrated. Recent studies show that globally a large percentage of wheat traded in the world’s biggest commodity markets are controlled by investment funds. The government took all measures to align the Indian food economy with the global marketplace and the reforms since 2002 were intended for this. To add to the problems, the government permitted speculative futures trading in essential commodities with a notification in April 2003.

An oft-cited reason for dismantling restriction on stocks is that they are a surplus over what people voluntarily wish to consume, representing a problem of plenty, as people voluntarily reduce their intake of cereals and instead consume animal products (milk, eggs, chicken etc) as their income rises. Associating stocks to demand-side factors, especially with dietary change toward higher-quality food, might be a short-sighted approach as the production of meat and dairy products requires large amounts of grain in the form of livestock feed. In order to produce a single kg of beef, it may take as much as 7 kg of grain. Hence, as caloric intake shifts to more protein, in the long run, more and more grain is demanded for the same amount of calories for consumption.

The basic arguments to curtail the accumulation of private stocks is that they result in greater inequality of access to food in society because during an inflationary period, there is a cut in purchasing power among poorer sections of the population. Moreover, the implementation of targeting food subsidy has not been effective compared with the earlier system of unconditional and universal access by households to the public distribution system. This leads to a situation of institutional denial to the poor of access to cheap food leading to increasing hunger.