How to determine black marketing?

Recently, the Chief Minister of Bihar, Jitan Ram Manjhi, stirred up a controversy when he said that hoarding and black marketing of goods by small traders will not be treated as a crime. He may have been politically incorrect yet he was logically correct.

The hoarding and black marketing by small traders have no material impact on the demand and supply of goods in the market as the quantity of goods being hoarded by these small traders are insignificant.

Black marketing might be socially reprehensible and ethically wrong but there is nothing to prevent a businessperson from increasing the price to meet the pressing needs of the escalating cost.

In a market-driven economy, where there is no price ceiling, it is difficult to determine whether the price that is being charged is black-marketing. In the case of commodities, where there is no concept of an MRP, the concept of black marketing is even more questionable.

Blaming the small traders of hoarding and black-marketing creates more panic than to actually resolving supply side concerns. In modern commercial economy, hoarding and black marketing is a flawed logic that is often blamed for price increase. Small traders with limited financial resources can hardly make any dent on the price of a commodity or its availability.

Politicians browbeat the mythical hoarders for price rise often forgetting that the activity of hoarding needs very large and continuous supply of finance which no small trader possesses in India.

The agricultural physical market in Bihar and other States do not operate on a leveraged model and is also not a heavily financed model, unlike the trade of crude and metals in the international scenario.

In the past, it has been conclusively proven that when non-binding price ceilings are put in place to prevent price gouging in the event of natural disasters, it may actually reduce incentives for sellers to be well-stocked with goods as they will be unable to command the full market price for the commodities.

Normally, the supply and demand dictate price. However, when prices are fixed, demand outstrips supply. Thus, shortages become inevitable. As experience with rent control shows, capping prices in times of scarcity has perverse effect of reducing quantity of commodity or the service supplied.

Consumers understandably get upset when they face dramatic price increases within a short time. However, capping prices would actually lead to less being sold, as suppliers reduce the quantity that they are willing to sell in order to avoid losses. Shortages are, therefore, exacerbated.

By contrast, anyone who tries to unreasonably price the commodity will find himself with unsold supply and will be forced to lower his prices to offload it. In reality, it can be very difficult to determine the extent to which price increases are greater than “necessary” and even more difficult to determine what is black-marketing.

The writer is a trade analyst

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