• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest
• The New Manager

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

G. Chandrashekhar

Advertisement

Mumbai Jan. 26

In its acute anxiety to control the political fallout of rising prices and consumer unrest, the Central Government, over the last 6-8 months, took a series of steps including banning exports, placing imports under open general license, reducing or withdrawing import duty and tightening trading conditions of several essential commodities of mass consumption.

Yet, going by inflation numbers week after week, the measures so far have been far from successful. Prices are hardly reined-in; if anything the situation has gotten worse. Food related inflation is a little over 9 per cent at the wholesale level and double-digit at the retail level.

The latest move of course is the temporary suspension of futures trading in a couple of pulses (tur/arhar and urad), with reduction in customs duty on palm oil following almost immediately.

Pulses

In this case, delisting of futures contract was preceded by a series of initiatives including withdrawal of 10 per cent customs duty on imported pulses and imports through Government parastatals. These steps did not yield any tangible benefit to consumers. It is likely that the policymakers resorted to the desperate last option of imposing a ban on futures trading after exhausting all possibilities to check price rise. There was also pressure from political parties and report from a Parliamentary committee that was not charitable to futures trading.

Price action in the physical market over the next few days and weeks will be a pointer to the shape of things to come in future. It would show the contribution, if any, of futures trading to price rise.

Edible oils

A duty reduction on imported palm oil has been resorted to.

While basic duty on crude palm oil is down by 10 percentage points to 60 per cent, duty on refined palmolein has been lowered by 12.5 percentage points to 67.5 per cent.

Clearly, the Finance Ministry has acted on the recommendation of Lahiri Committee which suggested a lower 7.5 percentage point differential between crude and refined palm oil (instead of 10 percentage points). This will encourage larger flow of refined palmolein, a product that is well accepted by Indian consumers and is readily marketable unlike crude palm oil which has to be refined locally and the market becomes vulnerable to the whims of large refineries. However, to retain the base price (on which to calculate customs duty) at July 2006 levels is a mockery. It shows how shortsighted policymakers could get and lose commercial and revenue perspective. If anything, base price should reflect market reality. After raising the base price, if customs duty has to be cut further, do it.

Wheat

Duty-free import of wheat continues until February 28. There are varying reports about the condition of the ensuing crop. There is uncertainty about government procurement volume. Prices will open at over Rs 850 a quintal (minimum support price of Rs 750 plus taxes). The role of private sector in wheat purchases will be critical. In any case, the country will have to import not less than 30 lakh tonnes of wheat in 2007 to augment supplies and keep prices in check. It would be sensible to keep the import option open and extend the free import regime without delay.

The real test for the Government would be in May/June when southwest monsoon hits the country. Any aberration in the onset or progress of monsoon would seriously impact the food market - availability and prices.

Limited Options

It is a matter of great concern that the Government is slowly but surely exhausting all the weapons in its policy armoury. What will policymakers do in future if their actions continue to meet with extremely limited success in controlling prices of essential food products?

Possibly, there is failure on part of the government to look at inflation - especially, food related inflation - holistically. From time to time, the price situation is sought to be explained away by attributing it to supply-side constraints or high international prices or stating that inflation is a monetary phenomenon or due to `base effect'.

These explanations may satisfy political allies and the Opposition parties; but bring hardly any relief to the really needy. It is of course absolutely necessary to tide over the current crisis; but if policy action stops with it, it would be great tragedy.

More Stories on : Economy | Insight | Agricultural Policy | Commodity Markets | Pulses

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
TRAI faced with shortage of officers

Copyright © 2007, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line