The persistence of food inflation has been a bothersome issue for public policy for some months now. And there can be no argument with the assertion that it should be a matter of serious concern to policymakers. The real argument begins when pinning down who, in the larger framework of government, is responsible for addressing this problem. On Friday, RBI decided to own up responsibility and raised CRR by 75 basis points in an attempt to suck out excess liquidity from the system. Clamping down on demand to address inflation caused by a supply-side phenomenon may indeed work over the medium term, but it will extract unnecessary collateral damage on growth.

Still, RBI?s move may have been acceptable if there was no other way to control food inflation. But there are plenty of other supply-side options that will better address the problem. It seems though that the department/agencies of government that should have been on the job have simply abdicated their role, leaving RBI to clear up the mess with a rather blunt instrument.

The minister in charge of agriculture, food, civil supplies, and consumer affairs, Sharad Pawar has spent much time talking prices up?sugar and milk being the obvious examples?instead of thinking about a policy to drive them down. There were even some recent rumours about the government rationalising his diverse portfolio to eliminate any possible conflict of interest?it?s certainly legitimate to ask if the same minister can look after producer, distributor and consumer interests all at the same time, and with satisfaction to each.

But the problem (and therefore solution) is also institutional. Here?s a clue to where it may lie. The department of food and public distribution lists on its Web site, twin objectives: 1) to ensure ?remunerative rates for our farmers?; 2) to ensure ?the supply of foodgrains at reasonable prices to the consumers through the public distribution system.?

The crux of the problem, hidden in the twin objectives, is that Indian agriculture is still run in an old-fashioned command and control mode where the government, and not the market, sets prices and as a corollary, quantities. The government, it is assumed, knows best about what prices producers should get and at what prices consumers should buy. And add to that the oft-repeated clich? of ?self-reliance? in food, and you can see that agriculture is still treated in the same socialist mode as industry was treated two and a half decades ago. The government, of course, sensibly gave up command and control for industry in the 1980s?that was a disaster because as we know well bureaucrats weren?t usually able to make price/quantity decisions like the market does. Now, we need a similar change in the government?s role in agriculture.

The key to any market-based reform is to remove all distortions in the price discovery mechanism?the government must get out of setting prices, procurement and distribution. Minimum support prices should be abandoned because they are a one-way street that follows the dictates of populism, rather than actual production and consumption. This is not to say that farmers should not get remunerative prices. But prices should reflect reality of demand and supply?they will be higher at times and lower at other times. The government can, of course, help farmers get a better price by doing just two things: first, allow them to export, and second, allow big retail, including FDI in retail, to establish a greater presence?if they source directly from farms, farmers will get a better price since the commission of intermediaries will be bypassed. If that isn?t sufficient, particularly in times of drought, government can offer farmers income support in the form of direct cash transfers that don?t distort prices.

Of course, the government must invest in the upgradation of the ?farm to market? infrastructure?irrigation, roads, supply chains, just as it continues to invest in infrastructure for industry and services. But that?s quite different from micromanaging the agriculture economy.

On the other side, for consumers, a market-based price mechanism will be more satisfactory. The elimination of intermediaries in the supply chain via big retail will benefit consumers as much as it does farmers. And in times when supply is short, if the government gets over the rhetoric of self-reliance and moves quickly on imports, prices won?t rise like they have this time around. Of course, the inefficient public distribution system that distorts prices and quantities, and fails to deliver food to the poorest in any case, must be abolished. Instead, like for vulnerable farmers, the government should have a direct cash transfer scheme for the most vulnerable consumers, which empowers them to buy food at market prices.

Interestingly, there seems a broad consensus across the larger political economy on consolidating market-based reform of the economy, with the government focusing on infrastructure and safety nets. Why should agriculture be left out of this worldview? The crisis of food inflation has presented the government a window to proceed with farm reforms, just like the balance of payments crisis in 1991 helped the unveiling of trade and industrial reforms. But will the government grasp the opportunity?

dhiraj.nayyar@expressindia.com