The Hindu Business Line : Government must strengthen commodity commercial intelligence

Mumbai, March 31 For the week ended March 15, inflation soared to a 14-month high of 6.68 per cent. The across-the-board increase in primary articles, fuels and metals has pushed prices to multi-week or even multi-month highs, raising serious concerns among policymakers, businessmen and consumers alike.

A sharp increase in food prices (mainly cereals, vegetable, edible oils and milk, all essential commodities of daily consumption) has dented the budget of poor families, in particular. Food inflation hurts the poor the most. In our country food is expensive. Of the monthly family expenditure, food accounts for as much as 55 per cent in rural areas and about 45 per cent in urban areas.

This contrasts with the US, for instance, where just about 15 per cent of the income is spent on food. Food prices are important for Indians as the former are one of the indicators of welfare levels. Importantly, the sharp rise in food and fuel prices was not entirely unexpected. Anyone with a reasonable understanding of global and domestic commodity market dynamics would have known how potentially explosive commodity markets were turning out to be even as early as the last quarter of 2007.

2007 pointers

Anticipating a sharp rise in inflation as far back as December 25, 2007, Business Line carried a commentary ‘2008 may unfold a scary inflation story’, predicting that crude would breach the psychological $100-a-barrel in the new year. “The country is likely to face serious food inflation in the first six months of 2008,” the article had warned adding “A combination of rising food and fuel prices is sure to put the government in the defensive in the new year”.

The article went on to forecast that to control prices, the government would be forced to resort to desperate measures such as imposition of further restrictions on export, reduction of customs duties and restrictions on procurement. Most of these have turned out to be correct.

Edible oil exports have been banned; and duty on imported oils reduced. Rice exports are now restricted with a minimum export price. Limit on wheat storage has been sharply curtailed. More measures may be in offing, as the government finds itself completely in the defensive.

Market indicators

The purpose of pointing this out is to demonstrate the government’s incapacity and failure to read market signals properly and take proactive measures in advance to fight the calamity. The government lacks adequate commercial intelligence and research capability to be able to have a robust price outlook for major commodities. Tinkering with trade and tariff policies as a reaction to changes in the market often fails to serve the intended purpose. The decision is taken late (lifting of sugar export ban) or is inadequate (edible oil duty cut) or even wrong (castor oil export ban).

Policymaking without adequate and timely inputs from the market is hazardous as has been proven now. Most of New Delhi’s initiatives of the last one year relate to trade, tariff and prices. The government is simply to continuing to exercise easy options. There is now growing suspicion that policymakers are shying away from taking really hard decisions to address the structural problems of the food sector. We have had enough of trade and price initiatives. We need non-trade and non-price initiatives that will begin to transform agriculture.

Strengthening the input delivery system, expanding irrigation facilities in a way that farmers are able to actually access water when needed (levy user charges), educating growers about modern agronomic practices, building rural infrastructure and access roads to markets, as well as delivering price and market information to growers are some of the crucial areas that deserve attention.

Agri roadmap

More important is to prepare a roadmap for the agricultural sector after assessing the financial, human and technological resources needed to reach pre-determined targets. We seem to be doing nothing to scientifically respond to the challenges of the farm sector, except making some cosmetic changes from time to time.

Be that as it may, some relief from high food prices is on the horizon. For the 2008-09 season, on current reckoning, prospects for major crops in the northern hemisphere are turning out to be favourable. Forward prices are already beginning to come off their record highs.

World wheat production is forecast to expand by over 40 million tonnes, while soyabean output in the US is forecast to be up by at least 10 per cent. Palm oil production is set to expand. Given these changing market fundamentals, speculators have begun to exit some of the agricultural commodity markets.

Price corrections

With declining global prices combined with ongoing Rabi crop harvest in our country (wheat, oilseeds, pulses), there is surely room for price correction. There will be some relief from high food prices. However, there is no room for complacency. The fight against inflation must continue.

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