A friend, a respected retired senior civil servant called to say that she found the analysis of food inflation (?Whistling in the Dark?, FE, January 15) very gloomy. Her gloom might turn into a nightmare if she were to study the series of measures the government announced the previous day and the explanation by Kaushik Basu, the chief economic advisor, the spearhead of efforts to rein in prices.
Kaushik Basu maintained that the new approach, far from being a rehash of previously tried, trusted and failed remedies, is ?nuanced?. He also said that the government is focusing on hoarding by its purpose, trying to infuse greater competitiveness and would consider a thorough overhaul of the public distribution system. An analysis of the current status would show that these assertions are either not borne out or relevant to the prevailing situation.
The food wholesale price index is up from 107 in the first week of 2006 to 193 in 2011, or by 80% over five years. Its disaggregation shows that the various commodity subgroups and years involved show considerable differences. Foodgrain prices went up by 12% and 21% in 2008 and 2009, respectively, while they declined by 3% in 2010. The fruit and vegetables price index has spurted ahead of the curve, nearly doubling in the last three years, from 108 to 212 (60% of which occurred in 2010 alone). Vegetable prices have risen even faster?the index has gone up from 109 to 273, or 150%. In fact, vegetables, with a 12% share of the food price index, accounted for nearly one half of the 18% food inflation for the year 2010. The fire today is in the subzi mandi.
And what does the government want to do? It acknowledged that the vegetable price situation is more difficult to manage but plans to review imports and exports of essential commodities, fine-tune tariffs and, in the medium term, set up farmers? mandis, mobile bazaars and rationalise local levies to facilitate smooth movement of commodities. The first part of these relate to non-perishables, which are not part of the problem today (but could be tomorrow). Only the last set and monitoring the weather situation are addressed to vegetable markets.
The mighty government economic think tank has failed to reckon with the single-most distinguishing feature of the vegetable system in India. The vegetable market is as close to the paradigm of perfect competition as we can find in real world. There are numerous buyers and sellers, with no entry or exit barriers. The produce is mostly undifferentiated. Every participant has access to the same information at all times. I shared this perception with Dr IG Patel, who not only agreed with it wholeheartedly but cited this often. My colleagues and I conducted the first-ever systems study of major urban vegetable markets and their hinterland in western India for the National Horticulture Board, the findings of which have been periodically updated.
As early as the 1980s, the western markets had become seamlessly integrated into a grid. This process has further advanced as means of communication have improved. Most supply areas are an overnight journey away from major urban markets, and signals of demand and supply pass back and forth almost instantaneously. For example, if a Vadodara trader buys five truckloads of tomatoes in Wai in Maharashtra, prices in the entire western region undergo a quick iteration and get adjusted. This process of price discovery and equalisation now covers almost the entire mainland. The crucial factor is that it is entirely market-driven and not because of any regulator. The market structures are stable and self-correcting. The quick price corrections following disturbances in the relatively short production cycle show the sensitivity of the market processes. Attempts to meddle in this free market are bound to be counterproductive.
The much-commented on 30% loss of produce is, in fact, mostly value destruction in the form of off-grade or somewhat deteriorating produce. There are markets for these as well. Hence, the institution of the enormously expensive cold-chain would only drive up prices, by five times or more by some estimates, without benefiting the aam aadmi.
What should the government do then? As stated in earlier columns, there is no escape from spikes in vegetable inflation in the short- and medium-term, as in the case of energy inflation. The only solution is faster production growth, which has its own pre-conditions not likely to be met in the immediate future. Basic remedies aimed at sustained productivity increases must start now and obstacles such as unrealistic mindsets of key policymakers must be removed quickly.
State finance ministers are to meet today to review the situation. Let us hope that being more in the local line of fire, they do not take the ?nuanced? approach of addressing vegetable inflation by measures to control grain prices and offering solutions to the problems of 2008 and 2009 for those of 2010!
The author has taught at IIMA and helped set up IRMA