Food fight

The high-level meeting on inflation convened by the prime minister is considering a slew of measures they wish us to believe represent a determined tackling of the problem. Among them, reportedly, is the banning of exports of a range of agri-products, including wheat derivatives; and also, the removal of a set of "essential commodities" from the list of those in which futures trading can be carried out. Food inflation is, of course, a real and pressing problem. There's little doubt that government policy must react swiftly and sensibly; but there's every fear that, instead of surgery to repair the broken innards of India's food supply, the government is going instead for a Band-aid, and an ineffective one at that, and then patting us and saying we will be fine now.

Export curbs are generally a bad idea, especially in the medium-term. They reduce the prices that farmers receive, thus altering their incentives; this will only exacerbate the supply problem. There's also an essential confusion to government policy here: consider the proposal that wheat exports be banned. India's winter wheat crop is likely to beat estimates, and while drought in Russia and floods in Australia mean the world grain stockpile may be dented this year, there isn't any reason to suppose that India's grain stocks are likely to vanish overseas; because, after all, the problem is

in the supply chain. Yes, there are specific sectoral problems, and those will need state attention. But that attention cannot be in the form of blanket export curbs. It will need a surgeon's scalpel, not a bludgeon. Or, of course, a Band-aid.

And any attempt to further restrict futures trading in agri-commodities will be not only useless, but in all likelihood counter-productive. In 2008, a committee led by economist Abhijit Sen found that price problems tended to be caused by supply shortfalls and seasonal factors, not futures trading. It actually went on to say that futures contracts were needed to stabilise prices but holes in the system, and insufficient farmer participation, caused by fear that the government would arbitrarily shut trading down, didn't let the futures markets do their price-smoothing job. The government is failing in its duty to respond to a crisis with forward-looking, visionary reform. This is a moment when India's consumers and producers understand the need for a comprehensive overhaul of agricultural supply. Yet the Central government seems to have chosen not only to not carry out reform, but to actually move backward, imposing ever more control. India will continue to pay for this failure.

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