"Traders not to blame for food inflation", ‘Business Line’, July 3, 2014

             Traders not to blame for food inflation

The Government displays considerable awareness of the public’s aspirations. Having identified the public’s concern with inflation, the Government has gone out of its way to signal its resolve to deal with it. The Government should certainly be moving to control inflation with alacrity. However, the principal measure that it has announced inspires little confidence. Interestingly, it is all too reminiscent of Indira Gandhi’s demonisation of certain sections of society, as opposed to coming to grips with a malfunctioning economy.

Last week, the Centre issued a directive to the state governments that they should fast-track courts dealing with hoarders. Their arrest is suggested too. This whole approach smacks of amateurishness and a total lack of understanding of the sources of the current inflation in India.

Over the past five years, the rising price of crude oil has impacted inflation as the economy relies on external sources for around 80 per cent of its needs. It would not amount to rocket science to see that raiding some kirana is not going to help. Terrorising traders is not going to be of much use either.

Simply cannot hoard

The greater part of the inflation since 2008 is due to the rising price of food. However, this food inflation does not have a uniform source. There has been inflation in the price of cereals and other foods. These are sui generis even though the price rise has been relentless for both. Principal among the other foods referred to are milk, vegetables and fish.

It cannot have escaped anyone’s attention that these goods cannot be hoarded for any length of time. In fact, the textbook example of a “spot market”, one in which the price is determined exclusively by current supply and demand is the market for fish, which has to be disposed of before it decomposes.

No hoarding is feasible here, and the trader must move with alacrity the inherited supply. There are, however, markets for some food which can be hoarded. This is the market for foodgrain. Foodgrain prices have not only been rising, but in certain phases have led the overall inflation.

However, this has next to nothing to do with private trade. The relentless rise in the price of foodgrain has to do with the raising of procurement prices for wheat and rice by the Government, often at rates that have exceeded the inflation rate. We know that the price in a market is too high when it results in accumulation of stocks, and this is exactly what we find. Stocks with the Food Corporation of India have risen. Apart from high procurement prices which serve as an incentive for farmers to sell to the Government, the Government has instructed the Corporation to ensure that prices do not drop, by procuring as much as possible.

This has meant that private trade has often found itself crowded out. So, far from being a hoarder, private trade has very likely been a bystander as the Government’s agencies have hoarded foodgrain. Actually, in the market for food which is subject to a natural cycle, traders have an incentive to not carry grain over to the next cycle as the price is likely to be lower at its beginning.

FCI’s role

Only extraneous intervention, such as that of public agencies, can alter this generally observed phenomenon. My work with Bharat Ramaswami, published over two decades ago by the Reserve Bank of India, demonstrated that in the Indian wheat market, till recently at any rate, the price has always declined in the first quarter.

Now no profit-maximising trader will, therefore, carry grain across the crop cycle. Therefore, traders cannot be held responsible price for increases across the agricultural year. This does not, of course, apply to the Food Corporation of India, which is not bound by considerations of profit.

In fact, a bureaucracy averse to being hauled up for bringing loss to the exchequer refuses to dispose of grain even when it is patently advisable to do so to control inflation. Here, the government machinery is actually more responsible for causing inflation than private trade. Indira Gandhi herself had burnt her fingers by nationalising the wholesale trade in wheat in the early 1970s, a move that she had to withdraw when inflation accelerated.

States too responsible

Nevertheless, while directing the state governments to arrest hoarders is almost certainly not going to check inflation, the Centre is right to draw their attention to the problem of food price inflation. Outside of foodgrain the Central government has very few instruments, if at all, to deal with food price inflation.

There is no central procurement of milk, vegetables and fish. Production takes place in the states and it is perhaps in recognition of this that agriculture has been designated a state subject. This also makes the states responsible.

There are several ways in which the states can influence food price inflation, but all of them essentially amount to lowering the cost of production. This requires focus on the production process, ranging from providing irrigation to building roads and storage facilities.

The misplaced focus on traders in the Government’s anti-inflationary strategy stems from a failure understand the relative roles of production and trade in food-price inflation. Traders can only re-arrange within a crop cycle the fixed stocks made available by the harvest. Only more production can enhance this stock. The Government shows little awareness of the scale of the problem.

Demand for food other than grain has a high income elasticity. This implies that if you aspire for double digit growth you would have to come up with much higher agricultural growth than we have had so far. Achieving even a 5 per cent growth of agriculture, corresponding to the current rate of growth of the economy, would be a daunting task. It can only be achieved by raising the productivity of land.

This requires serious governance, and is really what sets us apart from the East Asian economies which have solved permanently their food problem by raising productivity. This is despite having less arable land than us. It was achieved through the spread of irrigation and other necessary rural infrastructure.

But even poorly thought out policies have their uses if only to make us see more clearly what is needed. In this case, I can see two positives that emerge from the Modi government’s pursuit of traders to contain food inflation.

First, it does convey that the states have a major role in inflation control, something which they have seldom acknowledged. On the contrary, the revelation that ₹70, 000 crore may have gone down the drain in an irrigation scam in Maharashtra and the fact of Kerala having allowed its agriculture to almost vanish suggests that the states have contributed to the precarious food situation in the country.

Second, the Government’s action is tacit acknowledgement that supplies matter as far as food price inflation is concerned, and that monetary policy cannot deliver. However, expect little traction from raiding traders!