Ad hoc steps are no solution to food inflation

Instead of banning futures trading, the Centre should focus on augmenting supply

The threat of food inflation in India has resurfaced. The wholesale prices of top food articles with a combined weight of 14.34 per cent in the WPI rose 8.18 per cent (YoY) in June 2016 compared to 3.12 per cent in June 2015. In terms of their retail prices as measured by CPI, they went up 7.79 per cent compared to 5.48 per cent in June 2015.

Agri commodities including primary articles (such as cereals, pulses, spices, fibres and oilseeds) and manufactured products (edible oil, sugar and oil cakes) that are traded on NCDEX together account for a combined share of 6.71 per cent in the WPI basket. Thus, trading in these commodities does influence WPI. The main culprits for the rise in the prices of food and related articles are pulses, vegetables, and sugar, among others. It would be pertinent to examine how it will impact trading in agri commodities, going forward.

Genesis of the price rise

The wholesale prices of pulses led by tur (pigeon pea), urad and chana (gram) rose by 26.61 per cent (YoY) in June. In fact, in the last two years, the price of tur has doubled, while that of urad is up 120 per cent and chana by over 80 per cent mainly because of production deficiency. Pulses output is estimated at 17.3 million tonnes (MT) in 2015-16 against a total demand of 23.66 MT, thereby increasing India’s reliance on imports.

In June 2016, cereals witnessed a modest increase of 6.32 per cent in their prices compared to a decline of 0.39 per cent in June 2015. However, the price of sugar rose 26.09 per cent (YoY) in June 2016 compared to a decline of 13.26 per cent in June 2015. India’s sugar production is pegged at 25.1 MT in 2015-16 that fell from 28.5 million tonnes in 2014-15. With lower stocks and reduced cane plantings in Maharashtra and Karnataka, sugar output is estimated at 23 MT in 2016-17. That explains hardening of sugar prices.

On the other hand, the wholesale prices of vegetables soared by 16.91 per cent (Y0Y) in June — led by an exceptional rise (over 50 per cent) in the prices of tomatoes, primarily because of supply shortfall as rabi crops were damaged by drought. Another key commodity, potato, saw a 64.4 per cent rise in its prices in June.

Along with crop failures, lack of adequate cold storage facilities for preserving perishable vegetables aid seasonal surge in prices of common items like potato and tomato till the new crops come to the market.

Measures that don’t work

Rather than focusing on supply augmenting measures, government measures to deal with rising prices of key agri commodities are ad hoc in nature and often involve a crackdown on traders who are believed to work as a cartel and engage in hoarding. To control exorbitant rise in the price of pulses, government conducted raids and claimed to seize 1.3 lakh tonnes of pulses from hoarders across India. Yet, prices of pulses continue to be high.

Ideally, the government should have started importing pulses when the futures markets started signalling towards hardening prices. Another popular action to rein in inflation is to ban future trading in specific commodities. Government has banned or suspended futures trading in many commodities since the inception of national-level commodity exchanges thinking future trading is responsible for inflation. Post SEBI-FMC merger, we’ve seen many such ban actions.

The year 2016 started with the suspension of futures trade in castor and banning of fresh forward contracts in all agri commodities. The latest suspension has been in the case of Chana futures a month back.

Though most commodities got re-listed for futures trading subsequently these interventions surely dampen the motivation to participate or hedge on the exchange platform due to uncertainty.

The way forward

Experience shows that even after the ban on futures trading in agri commodities, high prices continued, be it potato or chana. Banning futures trading is a lazy solution to deal with food inflation. Price fluctuations are more in agri commodities which are not traded on exchanges such as tur and urad in pulses and potato among vegetables. Thus, government should rather focus on improving supply.

Populist hikes in MSPs for cereals increases the relative price gap between cereal and non-cereal crops, and over-promotes cereal production and shortage of non-cereal items such as pulses.

It’s important to realise that the best way to deal with price rise and hoarding is to ensure adequate supply, including timely imports. Crackdown on hoarders or ban on future trading is at best a temporary measure that often backfires.

The writer is VP and Head, Agriculture, Food, and Retail, at Biznomics Consulting

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