At 7.4%, inflation is no longer a worrying symptom. It has blown into a mighty concern, forcing policymakers to desperate measures. Along with the Centre, states have also started panicking. Most analysts feel that the current upsurge in prices is a result of inadequate availability. Simply put, the supply of several items, particularly foodstuff, is not enough. As a result, scarcities are emerging in various parts of the country leading to higher unit prices of what is available and being sold. There are some commodities for which the shortages are manifesting into really high price rises. These include pulses, edible oil, fruits and vegetables.

What is the reason behind lower supplies? Is it lower output resulting from bad harvests? This may partly be true in some cases. But otherwise, it is essentially a problem of supplies not becoming available in the open market due to what are typically referred to as ?bottlenecks?. These prevent supplies from reaching consumers even if they are physically available.

In India, systemic and institutional shortcomings create several bottlenecks impeding supplies. The presence of these bottlenecks, as it is, creates situations of artificial scarcity exerting pressure on prices. These pressures go up if tendencies to hoard increase. Hoarding is encouraged in situations where hoarders anticipate possibilities of quick gains by holding on to stocks.

Eliminating hoarding can help in bringing down prices of some essential articles, where such tendencies are most rampant. These include foodstuff, particularly edible oil seeds and oil, fruits & vegetables and fertiliser. It is true that with gradual reduction in number of ?essential? commodities the scope for regulating distribution has become narrower. However, a large number of products including drugs, foodstuff, oil seeds, hank yarn, fertilisers, etc. continue to be regulated by policies. Such regulation, unfortunately, has not only encouraged hoarding but has also obstructed free movement of goods from one part of the country to another.

The problem is as follows. The Essential Commodities Act of 1955 controls the storage and movement of a large number of agricultural commodities including pulses, edible oil and sugar. Under this Act, state governments are also empowered to issue control orders, give licence to traders, impose stock limits, restrict movement of commodities, enforce compulsory purchase of the commodity at the levy price and prescribe trading practices. Over the years, controls issued by states under the Act have had two repercussions. One, a group of agents dealing in food products have prospered with official patronage. These agents, armed with their permits and licences, have often resorted to hoarding and consequent blackmarketing. Two, the controls have restricted free movement of supplies from where they are available to where they are required. The impact of both these outcomes has been creation of artificial scarcities and higher prices.

There is a law against hoarding. The Prevention of Blackmarketing and Maintenance of Supplies of Essential Commodities Act was enacted way back in February 1980. The law extends to the entire territory of the Union of India except the state of Jammu & Kashmir. The Act empowers both Central and state governments to detain those who are found restricting supply of essential commodities (as specified under the Essential Commodities Act of 1955) for making gains in any manner. However, except for Gujarat and Tamil Nadu, application of the law has been very limited in other states.

One of the easiest ways to stop hoarding is to remove controls. And this is where it is necessary to take a close and hard look at the Essential Commodities Act of 1955. The Act was introduced at a time when food shortages were very common in India. It was important for the state to regulate supplies of essential commodities for tackling these shortages. However, the present context is entirely different. Rather than regulating supplies, it is now necessary to liberalise them as fast as possible. As long as controls remain, it is not possible for producers in one part of the country to respond to the demand generated in other parts of the country. Thus food markets will remain imperfect. Furthermore, controls will encourage agents to charge more on their stocked supplies leading to higher prices.

?Free? trade applies to trade both at home and abroad. There is a lot of sense in allowing cheap imports to bridge the gap between domestic demand and supply. But what if the imports are not cheap? Like now, when global food prices are reigning firm. A better and lasting option is to make domestic trade ?free?, by allowing easier and faster movement of supplies across the country. That can?t happen with the Essential Commodities Act controls. And prices, obviously, can?t soften as well.

The author is a visiting fellow at Icrier. These are his personal views