The news that the south-west monsoon has hit the Kerala coast on time augurs well for the management of inflationary expectations. However, the monsoon alone cannot douse inflationary fires. Apart from much-needed fiscal stabilisation, mentioned above, the government needs urgent policy reform. The task at hand has to be handled by both the central and state governments, as correctly emphasised by the Reserve Bank of India in its meeting with state finance secretaries. Till 2008 state governments were on track for fiscal correction, and were, in fact, doing better than the Centre. However, the recent trend towards populism in many states – made worse by the pre-election promises of chief ministers Jayalalithaa and Mamata Banerjee – and the likelihood of such populism in states that go to the polls in early 2012, including Punjab and Uttar Pradesh, do not bode well for fiscal correction and inflation management.
Against this background, the Union food ministry has proposed an action plan to reduce inflationary pressures and improve food management. The plan is, however, a mishmash of various ideas that have been floating around for some time. There is strong advocacy of organised retail entering the food chain with backward linkages with farmers, and the integration of the spot and futures markets for better price discovery and price stability. On the other hand, it has been suggested that the Essential Commodities Act (ECA) be amended to reintroduce compulsory licensing and registration of commodity traders. This will bring back the licence and inspector raj and contribute to corruption. On the positive side, the proposed linkage between commodity growers and organised retail trade can potentially reduce margins with fewer intermediaries between farmers and consumers. Organised retailing can also bring greater efficiency into the marketing of agricultural products, benefiting all stakeholders — farmers, retailers and consumers. On the downside, however, the food ministry’s plea for an amendment to the ECA to bring all essential goods under regulation and licensing regime seems weird. So does the ministry’s suggestion for creating centralised authorities at the state level for registration of dealers and traders with turnover in excess of prescribed quantities and issuing them licences for carrying out their business. The ECA, enacted originally in 1955 and amended on several occasions, is a retrograde measure that has outlived its utility and is wholly irrelevant today. It is worth recalling that the National Democratic Alliance government realised the irrelevance of the ECA and, therefore, substantially diluted the statute in 2002. However, this amendment was practically undone in 2006 by the United Progressive Alliance government. This was done to control prices, but it has, in fact, failed to do that. The curbs on stockholding, movement and internal and external trade of several key agri-commodities have proved counterproductive and limit the potential of competitive forces in keeping the price line under check. The ministry’s suggestion that the spot market be integrated with the futures market automatically becomes unworkable under such regimented conditions.
