ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Essential Commodities: 'Demats' and Imports as Panacea


‘Demats’ and Imports as Panacea

ven as wholesale price inflation in the aggregate is not as yet much of a problem, the prices of a number of essential commodities like wheat, pulses, vegetables, sugar, edible oils and fuel have risen abnormally. But, instead of taking appropriate actions where required, the government seems to be convinced that commodity price stability, farm viability and food security could all be

Economic and Political Weekly August 19, 2006

together achieved only within the framework of liberalised commodity futures markets.

This year the government did not procure enough wheat (a huge shortfall from the procurement target) for the public distribution system. With the amendments to the Agricultural Produce Marketing Committee Act and in the wake of price signals from world wheat futures markets, private trading companies like Cargill, ITC and Reliance have been aggressive buyers, offering significantly higher prices than the minimum support price for wheat offered by the government’s procurement agency, the Food Corporation of India. What this has meant is a decline in government stocks to much below the normal buffer stock level and a rise in the stocks held by private traders, mainly for speculative purposes.

The national agricultural policy of 1999 aimed at widening the coverage of the commodities futures market. Then, in the union budget for 2002-03 a decision was taken to extend forward and futures trading to cover all agricultural commodities. The huge volume of trading on the commodity exchanges now reflects the speculative propensity of the large trading firms. Futures price movements may be expected to significantly affect movements in the spot price when the government does not hold large stocks, for the latter have a dampening effect on spot prices. The speculators would also not want the government to resort to cheaper imports when domestic prices rise. Yet, the government is being advised to merely take positions on the commodity exchanges and not actually hold large stocks that entail costs of holding, transport and distribution. A “demat” buffer stock policy, it seems, is in the making. The government is also being advised, even more strongly, against bringing back the “control orders” in the Essential Commodities Act, which the BJP-led National Democratic Alliance government had done away with.

Recent decisions to import specific commodities at lower rates of custom duties to dampen the rise in domestic prices of these commodities will at best serve as short-term measures if international prices are lower than domestic prices and if the tendency of domestic prices to rise is indeed the result only of inadequate domestic supply. But there are cost-push factors behind the spurt in inflation in essential commodities (due to the rise in petroleum product prices), there is the speculative propensity of the large private traders on the commodity exchanges and the failure of the government’s management of the public distribution system.

With respect to the poor agricultural performance on the production front in a number of crops, there has been no reversal as yet of the severe deceleration of yield growth in rice and wheat of the 1990s. Indeed, the trend growth rate of production of wheat and rice may be less than that of population. With little or no improvement in yields, the movement of area away from rice and wheat that is being officially encouraged in the name of agricultural diversification may be leading to the decline in per capita output. In pulses, despite a technology mission, domestic producers do not seem to be adopting new pulse varieties; the sharp increase in imports and the consequent dampening of domestic prices may be deterring them from doing so. Coming to edible oils, a technological breakthrough is nowhere on the horizon. Here again, like in the case of pulses, growing imports are a disincentive to domestic producers. In horticulture too, there has been no increase in fruit yields over one and a half decades, while vegetable yields seem to have declined since 1999-2000. But the horticultural mission launched last year may not make much of a difference when agricultural extension services have hopelessly deteriorated and made worse off by fiscal crises in a number of states.

The government, however, could not care less. For its principal policy-makers, a “demat” buffer stock policy within the framework of futures trading, and relying on imports to ensure “adequate supplies” and “price stability” are all that matter.

Economic and Political Weekly August 19, 2006

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