Runaway inflation can be curbed by reining in food prices

Runaway inflation caused the Congress debacle in the recent state elections. The latest inflation figure is 11.2%, with food inflation touching 14.5%.

Inflation has averaged almost 10% a year for several years, one of the highest inflation episodes in history. All the other episodes (as in 1979, 1974 or 1965-55) were caused by major droughts. This is the first time that inflation, especially food inflation, has been so high despite decent harvests. It threatens to decimate the Congress in the coming general election.

Can this food inflation be reversed in the next five months? Yes, provided the Congress is determined to make this a top priority. The most obvious thing to do is to dump at least 10 million, and maybe 15 million tonnes, of wheat and rice from government stocks on wholesale markets. This could have a knock-on effect on other food items by changing inflationary expectations, which have become entrenched.

High onion and potato prices are likely to be reversed soon as the new crop comes in. But this must be buttressed by a fall in grain prices to really change expectations.

Grain of Reality

The government’s buffer stock norm for supplying ration shops is just 32 million tonnes. Actual stocks have typically been more than twice as much. The Commissioner of Agricultural Costs and Prices, Ashok Gulati, has denounced the holding of excess stocks — which rot because of poor storage — and called for open market sales. He says the cost of excess storage is perhaps Rs 80,000 crore per year. The political and human cost of inflation is even higher.

The finance ministry and RBI have long suggested dumping excess food stocks. But the food minister has always resisted the suggestion strongly. He and many of his Cabinet colleagues have an old-fashioned socialist mindset.

They worry that traders will buy 10 million of grain at depressed prices and sell them later at a big profit, drawing accusations of a scam. The accusations will be especially sharp if the main purchasers are foreign traders like Cargill.

Shooting Itself in the Foot The food minister and fellow socialists think the right way to control inflation is to eliminate the role of greedy traders, and channel all food through a benevolent government at subsidised prices.

But the proof of the pudding is in the eating: this approach has failed dismally to check inflation. The ideological vision of the government as saviour of farmer (through high government procurement prices) and saviour of the consumer (through subsidised food grain) was supposed to meet the needs of the aam aadmi (common man), and help re-elect the Congress. Instead, it has benefited not the aam aadmi but the Aam Aadmi Party!

There is no mystery as to why this approach has failed. Back in 1972-73, Indira Gandhi nationalised the wholesale trade in food grain to tame inflation.

She argued that the markets were terribly undependable and volatile. A marginal grain surplus caused crashing prices (hitting farmers), and a marginal shortage of production led to soaring prices (hitting consumers).

Her solution was to nationalise the grain trade, eliminating price volatility and ensuring a good deal for both the farmer and consumer. The great and benevolent government was supposed to triumph over the greedy market.

It didn’t work out that way. As should have been obvious, the government simply did not have the reach or capacity to procure all grain and sell to every consumer. Nor did it appreciate that most farmers obtained crop loans from traders by pledging their crop, and any takeover of the grain trade without simultaneous provision of financing would not work.

Only the Players Changed

Second, the notion that the takeover would finish hoarding was false. By procuring and storing grain market arrivals, the government became the biggest hoarder of all. This created an artificial open market shortage, so market prices shot up. Most people still depended on the open market, and were hard hit. Indira Gandhi saw that the experiment had not just failed but was conceptually flawed, and could not be fixed by repairs.

So, she abandoned grain nationalisation, acknowledging that government takeover could not provide cheap grain to all, and would yield inflation instead. Alas, the lesson has been forgotten. Most Indians today were born after Indira Gandhi’s failed experiment, and are not even aware of it.

Sonia Gandhi was persuaded by activists that the aam aadmi (common man) needed a Food Security Bill providing ultra-cheap grain to two-thirds of the population. The food ministry’s reaction was to procure record amounts of grain, ensuring it would always have ample stocks. Yet, this government hoarding has become an important cause of inflation.

Sonia Gandhi must reverse gear. Around 1-1.5 million tonnes of grain per fortnight should be auctioned in a dozen markets all over the country, adding up to 10-15 million tonnes in the five months leading to the elections. This cannot ensure a Congress victory, but will cut Congress losses.

What do you think?