The Hindu Business Line : ‘Onus on govts to handle commodity conundrums’

“Given the right policies, how things actually play out over the next two decades depends on governments taking steps to reduce oil dependence, promote alternative energy, combat climate change and boost farm productivity”.

G. Srinivasan

New Delhi, Jan. 1 Even as global food and fuel prices have come down from their elevated levels of last year in recent months to the comfort of global citizens, the dawn of 2009 provides a time for introspection as to how any such future spike in food and fuel prices could be addressed with greater finesse by the authorities, particularly in the developing and emerging economies like India.

A clue to how this could be attempted is provided in the latest Global Economic Prospects of the World Bank, even as the world media was fixated on its growth projections than on highlighting the Bank’s special chapter on Commodities at the Crossroads.

Rightly did the Bank point out at the outset that despite the fall in commodity prices, concerns abound about long-term demand and supply and about the impact of high commodity prices on the poor people.

While the fears are misplaced about dwindling supplies of oil, metals and foodgrains and ever-increasing prices in the future, authors of the study aptly said that “given the right policies, how things actually play out over the next two decades depends on governments taking steps to reduce oil dependence, promote alternative energy, combat climate change and boost farm productivity”.

This is easier said than done, given the development compulsions of emerging economies such as India which pre-empt resources for extending subsidies on fuel to all classes of people and foodgrain prices to below and above poverty people who are in legion than undertake any purposeful development work that could redound to incremental income gains to the poor.

Conservation efforts

The study’s contention that food prices would likely continue to be more sensitive to oil prices as a result of increased bio-fuel production from food crops, but new technologies such as non-grain-based bio fuels and other energy alternatives could make grain-based bio fuels uneconomical has not come a day soon.

With global crude prices having come down with a thud from their peak of $147 a barrel to less than $40 a barrel in a couple of months, the incentive for inaction or showing insipid interest in conservation by the authorities to achieve energy efficiency would now be greater and this needs to be guarded against, policy analysts suggest.

Uptick in inflation

It is revealing to note that the cost of higher food and fuel prices to consumers in developing countries in 2008 is estimated to have been about $680 billion with both food and fuel prices contributing to a sharp uptick in inflation, besides ballooning current account deficits in a number of countries by as much as 5 per cent of their gross domestic product (GDP).

As households in poor countries spend 50 per cent or more their income on food and only 10 per cent on fuel, the spurt in the cost of food and fuel has increased the number of poor and the extent of their poverty to an abject extent.

The Bank reckons that the rise in food prices between 2005 and the beginning of 2008 is estimated to have increased the share of the population of East Asia, West Asia and South Asia living in extreme poverty by one or more percentage points and the impact on the urban poor was much higher increasing the incidence of poverty by more than 1.5 percentage points in these three regions of Asia.

The Bank said it is critical countries react to higher food prices by increasing the assistance they make available to those most at risk and urged policymakers to restructure their support so that it is better targeted on the very poor.

Affordable programmes

It argues that doing so would help ensure that the next time food or energy prices spike, assistance programmes would be both more affordable and more effective at delivering assistance to those most in need.

It noted that targeted cash transfers tend to succeed best because they have relatively low administrative requirements and minimise the diversion of benefits towards less needy population groups.

Having said this, the Bank also points outs that public work programmes rarely provide sufficient coverage to meaningfully target poor families.

Fiscal burden

Lest this should be construed as policy prescription to member countries, the Bank report went a step ahead to state that regardless of policies adopted, it is “critical that the offsetting income support be clearly presented as temporary and include phase-out strategies to avoid creating an unnecessary longer-term fiscal burden”.

In one stroke, the Bank dissuades public work programmes such as the National Rural Guarantee Employment programme of the present government and maintains that these relief measures must be purely temporary, leaving the authorities none the wiser as to what course of action they have to put in place to make a difference to lift the sagging spirit of vulnerable sections of people in the face of deficiency of demand!