Public CompanyFixing food prices
Business Standard / New Delhi December 25, 2009, 0:36 IST
Every time inflation hits the headlines, the political blame game begins. This time too, as food prices soar, everyone in the ruling coalition and the government is passing the buck. It is possible that there is no one guilty party and a combination of factors, involving several actors, is responsible for the current price spiral. Of all the proximate factors, the most important appears to be expectations. Each time prices begin to rise, the expectation of a further rise can drive prices further up. That is precisely what is happening. At least one explanation of government spokespersons, that food price inflation is due to improved terms of trade for farmers, is not borne out by any data as yet. The gap between farm-gate prices and retail prices is so wide that farmers do not seem to be the most important beneficiaries of the recent spurt. Middlemen, wholesale and retail traders seem to be creaming off the better part of what consumers pay for food, especially vegetables. These intermediaries benefit from an environment of rising inflationary expectations. Indeed, expectations feed outcomes, with traders charging more because they expect consumers to pay more!
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The Union finance ministry’s Mid-year Review of the economy has taken the view that higher farm production is the only durable solution to food price inflation. This implies that nothing can be done in the near term, since production can be increased only in the medium term. Little wonder then that the opposition parties and state governments are blaming the Centre, while the Centre blames the states. Whatever the blame game, there is no reason why food prices should rise sharply. Apart from that the factors responsible for the recent spurt in prices are commodity-specific, the fact remains that there is no overall shortage of foodgrains, with the government itself holding nearly 44 million tonnes of food stocks. In sugar, bad policy has contributed to the price surge. In pulses, nothing much can be done in the short term, with production remaining stagnant for over 20 years and world trade being limited. Fruit and vegetables are impacted by seasonality and the arrival of the winter crop may ease prices. What seem to be driving food prices up are expectations shaped by vested interests and the media. The wide gap between farm prices and retail prices shows that the real solution to such supply-induced price shocks is better supply chain management.