The Hindu Business Line : Deflating food prices

Barely ten days after the Prime Minister, Dr Manmohan Singh, asserted in Mumbai that ‘the worst is over’, the chairman of the Prime Minister’s Economic Advisory Council is on record that food inflation is the key policy worry for the government. Simply put, according to Dr C. Rangarajan, the worst is yet to come. He expects the Wholesale Price Index to rise to 6 per cent by March 2010. In the coming months, food inflation has the potential to reach double -digits for a combination of reasons including lower farm output and steadily firming world commodity prices. The Council’s recommendations to the government to protect the rabi crop right through the season and strengthen the public distribution system are, of course, well meaning; but the ability of the Centre to act on the two suggestions is rather limited because much of the action lies at the State level.

Be that as it may, a key reason for the unaffordable open market prices of food is the unusually large increases granted in the minimum support price (MSP) for various agricultural crops in the last two seasons. Without doubt, the price hike has altered the terms of trade somewhat in favour of agriculture and helped partially correct the historical sectoral distortion. For the plethora of risks farmers face, the palliative of a higher MSP is surely deserved. Yet, a higher MSP sets a benchmark and lifts open market rates correspondingly higher. While no one can justifiably argue against growers obtaining higher support prices, it is a tragedy the MSP regime has done nothing to ensure production and productivity gains. In other words, under Indian conditions, the supply response to prices is either limited or non-existent. For instance, in the current kharif season, despite the higher MSP, growers are no better off because output has contracted in a failed monsoon. Beyond the farm, the long and inefficient supply chain pushes costs higher. Consumers therefore continue to pay high prices for essential food commodities of mass consumption. New Delhi’s trade and tariff policies for food products too are reactive rather than proactive. Commercial intelligence about global market dynamics is inadequate. The immediate need is to quickly augment availability (if necessary through imports), ensure effective distribution and curb speculation. Food inflation hurts the poor the hardest. The time-tested public distribution system, despite all its limitations in terms of leakages and so on, still does help deliver subsidised rice, wheat and sugar to a large number of the really needy. The Centre should expand the basket to include pulses and cooking oil. We need to infuse efficiency into the distribution system through strict supervision and use of technology such as smart cards.

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