Finance Minister Arun Jaitley is an intelligent man. So, while one can empathise with the fact that rising inflation—the wholesale prices index punched in at 6.01 percent in May, a five-month high—is going to play spoilsport to his plans to revive growth, he has to talk of real remedies, not illusory ones.
His comment, that speculative hoarding may be one cause of rising prices, falls in this category of illusory villains. According to The Hindu, he said: "The rise in prices of food articles can also be attributed to withholding of stocks on account of apprehension of a weak monsoon." He asked state governments to take effective steps to prevent "speculative hoarding".
In case Jaitley hasn't noticed, he can catch one big hoarder all by himself: the Food Corporation of India (FCI) is India’s biggest food hoarder. The latest figures show that the government’s procurement arm (or its hired godown keepers) are hoarding over 62 million tonnes of rice and wheat (as on 1 June), apart from another 11.3 million tonnes of unmilled paddy and small quantities of coarse grains. These together constitute more than four times the buffer stock we really need.
If the Food Security Act were to be in force, the requirements are reckoned to be around 50-55 million tonnes annually. But current stocks are in excess of even this high figure.
Clearly, the first hoarder to catch is the FCI, which has been converted from a moderate buyer of grain at the start of the UPA years (in June 2005, the government was sitting on just 28 million tonnes of stocks) to a giant hoarder towards the end. We now have a T-Rex that guards and hoards food rather than allowing it to be consumed.
So, Jaitley should be the last one blaming shifty-eyed private hoarders and speculators for food inflation. While there is nothing wrong with making life tougher for hoarders by reducing wholesale stock limits or making credit costlier, the cause of current and past bouts of food inflation have almost nothing to do with private hoarding. Private hoarding and profiteering always happens on the fringe, just as your prudent housewife will store water if a supply cut is announced by the municipal corporation.
The real causes of food inflation are more deep-rooted. They lie in the undue emphasis given to cereal production over protein items (pulses, milk, veggies, eggs, meat, fruits) in order to feed the endless appetite of a beast called the Food Security Act.
But the Food Security Act is still a paper Act. Even though it has not been implemented, the UPA managed to pour ghee on the food inflation fire.
To build up stocks for the demand spike expected after the implementation of the Food Security Act, the UPA steadily pushed up minimum support prices (MSPs) to levels where buffer stocks were steadily becoming far in excess of needs; states keen to implement their own food security bills added a bonus to the Centre’s MSP, which impacted market prices even more; second, the UPA’s money-spending schemes in rural areas (NREGA, Bharat Nirman, etc.) pushed up rural wages where they stoked a wage-price spiral; but this wage rise pushed demand not in the direction of cereals, but proteins. But here the UPA failed completely. The special emphasis needed to increase production of pulses and poultry and milk production never happened.
So what does Jaitley need to do to bring down food inflation? The answer is obvious: do the opposite of what the UPA did.
First, he should keep future MSP increases to very moderate levels, so that farmers shift to other crops; it is pulses that need to be incentivised. Imports can also be considered.
Second, he should release large stocks of rice and wheat in the market to bring down cereal prices. This will directly impact food inflation.
Third, incentives must be given to increase cow herd sizes (through the import of high-yielding Jersey and other cows from abroad) to increase milk production. Poultry products and feeds can be given tax-breaks for higher production or productivity.
Fourth, the NREGA scheme needs to be reworked to delink wages from being fully indexed to inflation, and projects undertaken under NREGA (currently, almost all the work is a boondoggle) must create real assets, real infrastructure, so that the supply chain for food is made more efficient over time.
While the first two ideas will have an immediate impact on food prices, the latter two will take one or two years to bring down the prices of protein-based products by increasing supplies and improving infrastructure.
So, Mr Jaitley, all you need to do is the opposite of what the UPA did. And yes, you can ask your government hoarder to disgorge his stocks immediately to cool prices.
Updated Date: Jun 18, 2014 09:21:16 IST