• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Stocks

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

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources

Group Sites

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

G. Chandrashekhar

Mumbai , March 9

AS general elections are round the corner, the Government is concerned over rising inflation caused by spurt in the prices of essential food products such as edible oil and sugar.

Experts in different ministries are reportedly mulling various options to bring prices down. With the `onion experience' still fresh in memory, none wants to take a chance with the voters.

An interesting feature is that, unlike on many previous occasions, the price escalation this time is not the result of shortages. Indeed, this year, the country has enjoyed one of the finest monsoons in recent memory and the Government itself has been crowing about a major rebound in agricultural output.

Production of almost every major crop has increased in 2003-04. Even though sugarcane crop is down this time, the country has sufficient stocks of sugar to help meet demand. In case of edible oil, we are likely to produce at least 20 lakh tonnes more indigenous oils than last year. Imports are allowed liberally and close to 12 lt of various oils arrived between November 2003 and February 2004; and more consignments are in the pipeline.

Thus, there is no real problem as far as supplies are concerned. So, what is driving prices up? It is demand that is driving prices up. A 10 per cent growth in agriculture and related activities this year has put lot more income in the hands of close to 70 per cent of the population.

There is a sudden surge in demand with rising incomes. The large increase in income has materialised after 3-4 years of indifferent monsoons, fluctuating farm output and low commodity prices. As Indian commodity markets integrate with global markets, global influences impact prices here.

Cotton and oilseeds are two good examples. Despite a sizeable increase in indigenous production this year, prices are up sharply because of improved demand conditions. Worldwide, the markets for cotton and oilseeds (especially soyabean) are booming. To a considerable extent Indian farmers have reaped the benefit of high international prices impacting domestic prices.

It is equally necessary to state that investor and speculators too are benefiting from the price rise. In anticipation of a price rise in the domestic market (under the influence of global price movements) speculators have build up considerable inventory. Those holding long positions are making every attempt to maintain prices; possibly push them up and benefit from the price rise.

Their risks are hedged in commodity futures exchanges. It is of course a legitimate business activity as there are no legal restrictions anymore on storage limits or borrowing from commercial banks to finance inventory building of commodities.

With general elections slated for next month, the Government's concern has turned towards consumers. In order to rein-in prices, there are suggestions for reduction of customs duty on edible oil imports; but a cut in duty may not result in lower prices given the fundamentals of the market.

Currently, under the influence of soyabean oil, world market for vegetable oils is characterised by strong prices. In India, the rate of customs duty on imported soyabean oil is the already the lowest at 45 per cent (WTO-bound).

India is a producer of soyabean oil and imports about 12 lt a year. Given that world trade in this oil is about 9.5 million tonnes, India's ability to influence world soya oil market through the customs duty route is rather limited.

On the other hand, out of world trade of about 20 mt palm oil, India accounts for about 3.5 mt or one-sixth. As the world's largest importer of palm oil India is in a position to influence the palm oil market to some extent. However, ironically, in the past, every time India reduced customs duty on palm oil to reduce domestic prices, export prices of overseas suppliers went up, largely neutralising the effect of duty reduction here. There is nothing at this point of time to suggest that a cut in customs duty on palm oil (from the present 65 per cent on crude palm oil and 70 per cent on refined palm oil) would actually result in lower domestic prices.

Looking at the desperation of Indian Government, overseas suppliers would jack prices up to the extent of neutralising the duty reduction. Most likely, the only beneficiaries would be Indian importers - many of whom would make a windfall profit by paying lower rate of duty, but without delivering any actual relief to consumers.

In case of sugar, elections and price rise offer an excellent opportunity for both policymakers and sugar mills. Release of higher monthly free-sale quota to contain open market prices will lead to the desired result of containing price rise. At the same time, mills would be happy to liquidate stocks they have been carrying for long. With lower production this year and rising demand, the sugar price situation is potentially explosive.

Again, interestingly, while politicians may be worried about price rise, there is no palpable resentment amongst consumers. Unlike in the years when serious shortages and sharp price rise led to strong agitation by consumers, this time there is no evidence of any consumer unrest because of the absence of the psychosis of shortage and the availability of essential goods ``at a price''.

Politically it may have suited the Government to seek a fresh mandate at the shortest possible notice. But a short notice can potentially create some unexpected problems. One such is the control of inflation. A knee-jerk reaction like reduction of customs duty would not deliver real benefits to consumers. The policymakers must simply `grin and bear' with the market until the polls and not tinker with revenue measures to gain short-term political advantage.

More Stories on : Insight | Agricultural Policy | Oilseeds & Edible Oil | Sugar

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

Stories in this Section
Commodities futures gaining ground

Copyright © 2004, 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