Hoarding is the direct result of a policy that prevents free movement of produce which ultimately leads to conferring pricing power to speculators. food trade

Over the last 7-8 months, the Centre has gradually lifted restrictions on exports or holding of stocks by traders on a host of farm commodities, from wheat and rice to sugar, cotton, milk products and onion. But with food inflation in June crossing 10.8 per cent and threatening to go up further on the back of a deficient monsoon, there is renewed official enthusiasm to bring back many of these controls. Last week, the Food Minister, Prof K. V. Thomas, said that the Centre was mulling imposition of stockholding limits on various food items, besides “reviewing” its overall farm export policy in August. Given the extent of its political vulnerability today and also past record of resorting to short-term, knee-jerk measures without analysing their long-term consequences, one wouldn't be surprised to see the Centre doing precisely what Prof Thomas is suggesting in the days ahead.

Such reactions, to start with, betray a poor understanding of the drivers of the current price increases in food articles. These are largely coming from perishables like vegetables (49 per cent inflation in June), inland fish (38 per cent) and poultry chicken (20 per cent) that, by their very nature, cannot be hoarded for long periods. Even the hoarding that takes place has more to do with government policies, which inhibit the produce from moving freely from farmers’ fields to the consumer and force all purchases to be routed through licensed mandi intermediaries. This gives rise to segmented markets, which do not allow supply-demand imbalances to be corrected faster across time and space, making them naturally prone to speculation. Stockholding restrictions may work better in the case of cereals, pulses, sugar or edible oils, but only in theory, while being counterproductive in practice. In cereals, the biggest hoarder is actually the Government, which has bought up some 37 per cent of the country’s total wheat and rice crop this year! In pulses and edible oils, the problem is primarily one of domestic production simply not keeping pace, contributing to their combined import bill almost touching Rs 56,000 crore in 2011-12. Curbs on local trade, if anything, would only disincentivise growers from taking advantage of remunerative prices to ramp up output.

That raises the main point. Farmers and agro-processors, like normal businessmen, need a stable policy environment to operate in. It is patently unfair that only they are subjected to duty-free imports — as is the case with most farm products now — even while the Damocles' sword of export bans and trade restrictions constantly hangs over their heads. While reintroducing limits or turnover requirements on stocks may help the Centre show it is serious about fighting inflation, their effectiveness is entirely dependent on implementation by States: Inevitably, these lead to creation of rent-seeking opportunities for corrupt local officials. And the ultimate loser when producers are hurt is the consumer.

(This article was published on July 22, 2012)
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