How about using a counterintuitive tool, driven by market logic, to get a grip on the inflation problem? For quite some time, as the wholesale price index (WPI) has cut loose, the government has tried to play the supreme arbiter, losing the plot in the process. That, of course, is to be expected in a globalised world, where the rules of the market economy have only become more robust, sadly against the expectations of those who love to play god with the fortunes of ordinary people. The Indian government, too, sees merit in those rules, but runs scared of acknowledging their efficiency. Perhaps this inflationary episode is a splendid opportunity to demonstrate that it works well and works for everybody.
Just take the food problem. Within a couple of days, the Food Corporation of India (FCI) will fan out to the wholesale wheat markets of Northern India to mop up the grain. The company?s officials will buy the wheat at a minimum support price of Rs 1,000 per quintal, an increase of Rs 250 over the price for 2007-08. This escalation was prompted by what happened last year, when procurement was hopelessly short of target. Against a production of 75.8 million tonnes of wheat, the government got only 11.1 million tonnes. The department of food in the ministry of agriculture acknowledged it was a combination of low market arrivals and high private sector participation, which in turn encouraged farmers to hold back their supplies in the expectation of better prices.
But despite the low procurement, there was no shortage of wheat for public distribution. Till December 2007, despite rising prices, less than 90% of the monthly allotted quota (again, government data) of wheat was lifted by the state governments to keep their public distribution system well stocked. By then, the Centre had already shot itself by screaming about the grain shortage to top up the buffer stock of 4 million tonnes. So it was that it rushed to the international market to import 1.8 million tonnes of wheat. Naturally, grain traders abroad heard the pickle India had got itself into, and prices went up. That, in turn, created a bizarre spectacle of the government refusing to allow Indian farmers to export at higher prices, and yet importing wheat at prices way above what it offered to local farmers.
Would the government not do better by adopting a counterintuitive line? That would mean accepting a perfectly market-driven format. Thus, instead of again asking FCI to replenish the central pool, it should be asked to buy less than last year?s on the premise that stocks are adequate. In fact, they are.
There is economic rationale in this approach. The central pool?s stock of wheat is more than 4 million tonnes. Government agencies also acknowledge that farmers have developed considerable staying power, partially spurred by the presence of large-scale retailers. So, why expect farmers to sell cheap?
Low procurement would help all concerned. It would send out a confusing signal to the world grain market about the government?s intentions, reducing the scope for traders to take a one-way bet on how India, the market?s largest buyer, would behave. This is exactly how large players determine price movements and thus avoid becoming price takers. By staying off the market, the government would also free the space for private players to stock more. They are not only the best antidote to local hoarders, but also offer higher prices to farmers. At the retail level, their mutual competition keeps shelf prices soft. Farmers, well inclined towards private players already, would see the benefits of competition driving up their earnings.
Moreover, as the stock movement last year has shown, the public distribution system would still be well fed, so the government need not panic about a food crunch. Following the rules of the market would finally demonstrate how ineffective state intervention is, and maximise public welfare.
