Sanjay Kaul, MD & CEO, NCMSL

Combating Food Inflation: Populism and Market

As the D-day for the Budget approaches, a key concern for the Finance Minister will be to moderate the unprecedented food inflation that has dented the UPA Government’s image of working for the “Aam Aadmi”. The challenge is even greater because this has happened in a scenario of high food subsidies. With an already large fiscal deficit the ability of the Government to pump in more money into food subsidies is not an option. Two sets of measures taken in the last year have clearly not helped. The first was in the nature of regulatory restrictions. These regulatory measures included delisting of futures contracts, imposition of stock limits, de-hoarding drives and movement restrictions. Sugar was delisted and strict stock limits imposed. Paradoxically, most of the sugar price inflation has taken place after these measures were put in place. Similarly, stock limits have been imposed on pulses and edible oils. Paddy/Rice has been subjected to movement restrictions in several States. These cosmetic measures have neither had any impact nor helped, because they have not addressed the real supply side bottlenecks. Now, the Government has announced it wishes to do more of the same! The second set of populist measures taken for containing food grains prices has been to increase the allocation of rice and wheat under the Public Distribution System (PDS). This has raised the food subsidy bill to over Rs. 55700 crore this year. Despite such a large budgetary allocation, these measures have not given relief to the common man who largely depends on the market. This is because the PDS is dysfunctional, and has a large element of diversion and leakages. What then does the Finance Minister do? Clearly, the solution is addressing the supply side problems. Domestic supplies of pulses, edible oils and sugar that are in short supply need to be augmented through imports to ensure there is a demand-supply balance. Large-scale imports even at a small subsidy should be directly injected into the market through an on-going market intervention scheme. The Spot Exchanges such as the NCDEX Spot Exchange already have transparent electronic platforms which can be used for selling the imported stocks to bulk consumers, traders and processors. In respect of wheat, the Government already has over 17 million tonnes of wheat, much above a required buffer of 7 million tonnes. Such stocks should also be offloaded into the market. Direct market interventions will have a salutary effect and can provide immediate relief. Fortunately, international market prices in respect of edible oils and pulses are relatively subdued and the Government would be wise to tap the international market without hesitation if it is serious in combating food inflation. Over reliance on the PDS and regulatory measures without adding to the stocks available for distribution is a recipe which has little chance for success. Is the Finance Minister listening?

Sanjay Kaul, MD & CEO, NCMSL