The Hindu Business Line : Controlling inflation, the supply management way

Control of inflation is a managerial process. One can neither blame global forces nor assume that mere tinkering with interest rates will dampen demand and, thereby, rein in inflation. Supply management, one of the hardest and most important tasks for any government, alone can bring inflation under control, says SUMIT K. MAJUMDAR.

Supply management processes can be utilised to check price rises by enhancing market efficiencies.

Price levels are an expression of the efficiency of the transactions completion process within a market economy. The management of prices becomes important in an economy as price levels directly impact the standard of living.

In a growing economy, where demand and ever-increasing transactions drive prices on a monotonic upward trajectory, the role of supply management is critical. Nevertheless, as governments adopt the market mantra, there is also an ever-increasing reluctance to make administrative interventions.

Yet, markets fail. They fail spectacularly and continuously. Because this contingency is predictable, governments put in place appropriate regulatory frameworks. Important enforcement mechanisms relying on administrative interventions are used to make markets work.

Such mechanisms and interventions ensure that the twin goals of equity and efficiency are met. An administrative intervention would be to enforce price monitoring and supply management processes across a country so that the weaker and vulnerable members of society, who are most affected by price hikes, do not egregiously suffer.

Looking Back in Anger

In India, the most spectacular case of market failure in the 20th century was the Bengal famine. Due to the rapaciousness of a trader cabal, led by M. A. H. Ispahani, directly supported by the then Bengal Civil Supplies Minister, H. S. Suhrawardy, and obliquely supported by the then Viceroy, Linlithgow, prices rose so dramatically in the face of reduced supplies that, unable to purchase food or procure it, more than three million people died.

The Government of Bengal and the Government of India immediately learned from their mistakes and the Department of Food under Robert Hutchings and the Department of Industries and Civil Supplies under Akbar Hydari, were set up in Delhi. The first department would procure food and the second would distribute it.

To avoid a repetition of Bengal, in Bombay, led by an Adviser to the Governor Henry Knight, a Civil Supplies Department under the redoubtable A. D. Gorwala, ICS, as Civil Supplies Commissioner, and D. S. Bakhle, ICS, as Director of Civil Supplies, was set up. Market regulation and distribution structures were evolved so that markets worked efficiently and fairly. The Bengal story did not occur in Bombay.

Taking these leads, Madras stiffened its civil supplies organisation under a Member of the Board of Revenue who was also Commissioner of Civil Supplies. A senior Collector was appointed as Secretary to the Commissioner of Civil Supplies and a colleague of his was appointed as Secretary to Government in the Food Department. The latter was responsible for procurement of food. All other activities came under the civil supplies organisation.

At its peak, the Madras Board of Revenue’s Civil Supplies organisation consisted of eight ICS officers, under the Commissioner, dealing with issues such as regulatory codification, licensing, monitoring, publicity and enforcement. A structure to regulate markets and make them work properly was put in place. There was substantial crop failure, but Madras did not suffer the fate of Bengal.

Supply Management model

Subsequently, the Bombay model was used to modify the Central organisation to coordinate supply management matters on an all-India basis. In fact, the Government of India model proved to be so successful, throughout the 1960s to the 1980s, that, in a World Development Report of the 1980s, the Word Bank commended the supply management model that India had put in place to ensure food security and constrain market failures.

The public distribution system that had emerged over the years was the finest of its kind in the world. The storage infrastructure was world class. Along with a distribution system, all of the other complementary components of a supply management system were in place. The Word Bank recommended the adoption of the Indian supply management model throughout the world where shortage of food and other essential commodities might exist.

Market mechanisms require regulation, and supply management has many components:

The regulatory codes have to be put in place and implemented;

Traders have to be licensed;

For markets to be in reasonable equilibrium prices have to be controlled, if necessary;

Markets also have to be made transparent and efficient via relevant publicity;

Prices also have to be continuously monitored so that there is no gouging;

Arbitrage prevention is a major supply management activity;

Cartelisation prevention is a major component of the supply management process;

Quantity monitoring is an integral part of the process to prevent hoarding,

Quantity management is vital to supply management for stockpiling of safety stocks;

Weights and measures have to be standardised for consistency of transactions.

In fact, some of the above tasks are so important that in many civil supplies organisations across India, policemen have been in charge. In the United Provinces, an officer of the rank of a Deputy Inspector-General of Police was Civil Supplies Secretary during the 1940s, and in the Government of India, for a number of years in the 1980s, an IPS officer was one of the Joint Secretaries in the Department of Civil Supplies.

What is to be done now?

India has a substantial history of appropriate civil supplies management. Crop failures and associated markets failures of the 1960s and 1970s were skilfully managed and India emerged relatively unscathed. There are structures in place, both at the Centre and the State, so that a national process of supply management can be utilised to constrain price rises by enhancing market efficiencies.

In the last major case of a possibly great market failure across the whole nation, in the late 1980s, the supply management system was effectively used to bring prices under control and improve the lot of the common man. Not that this, of course, actually stopped the government of the day from being comprehensively annihilated at the ballot box. As the former U.S. President, Mr Bill Clinton, once remarked about voters’ motivations: “It’s the economy, stupid!”

Nevertheless, the inability of the system to forecast the bumper wheat harvest, and the subsequent purchase of imported grains, leads one to believe the worst. Yet, there are now enough stocks to create a strategic stockpile that can be used for judicious interventions.

What is to be done now? Abdication of government responsibilities is simply not acceptable. Control of inflation is a managerial process. One cannot wish it away. One cannot blame global forces. One cannot also assume that the mere tinkering with interest rates will dampen demand and, thereby, rein in inflation.

For a start, the relatively dormant supply management organisations, which exist in India, have to be revived and resuscitated. The activities of supply management can be decentralised to the States since much of the tasks are actually States’ subjects, within the framework of Centre-State relations. Yet, the Centre has an important role in coordinating and monitoring the supply management process all over India.

Having a market economy requires interventions when there is a sharp decline in efficiency or there is the possibility of failure. The enforcement of regulations on a national basis provides economic agents with the comfort that systemic inefficiencies are not going to whittle away the gains of economic progress to naught.

Governance is hard work and supply management one of the hardest and, yet, most important tasks that any government has to perform. It is the major activity that will bring inflation in India under control.

(The author, Professor of Technology Strategy, University of Texas at Dallas, can be reached at majumdar@utdallas.edu)