Monday, April 02, 2007

Forcing private firms to not buy wheat

The media has been hot on the trail of stories of the government forcing firms like ITC to not buy wheat in Punjab and Haryana: IE, ET, TOI, Monsters and critics, India PR Wire. Update (13/4): it seems to have worked; the government seems to have pretty much bought all the wheat from Punjab and Haryana.

Business Standard has an edit on this problem:

The large corporations who are participants in the wheat trade have been informally requested by the Central government to not buy wheat from Punjab and Haryana. The context is that last year, firms like Cargill and ITC had bought up roughly 1.3 million tonnes, or 17 per cent, of Punjabs wheat output, by paying Rs 20 per quintal more than the price offered by the government. The legitimacy of the governments request is suspect, and various industries (cement, steel) have demonstrated in recent weeks that they are not about to panic because the government frowns on their pricing or other decisions. Everyone knows that the government has the power to order tight stocking limits for essential commoditiesthus forcing wheat supplies into the market. Still, can and (perhaps more important) should the government come in the way of a private transaction between two citizens of India?

There is a potential shortage of wheat, and the government wants the private sector to step aside. However, the supply/demand situation in the country is not altered by shifting wheat from private to public hands. When thinking about Indian food security, what matters is the supply of wheat in India not the control of wheat in the hands of the government. The private sector does a better job of cost control and the use of technology in purchase, ransportation and storage. By elbowing out the private sector, and forcing this industry to be a government monopoly, the cost suffered by India goes up. The government has a long history of allowing wheat to spoil in storage. The private sector does a better job of taking care of wheat in warehouses. If more wheat is lost in storage, the country loses.

The firms concerned will continue to be in a business which requires wheat as raw material. Their buying pressure will be greater in Rajasthan. This will excite many people to buy wheat in Punjab and Haryana, transport it to Rajasthan, and sell to these corporations. Once again, this is inefficient for India because of the transportation and labour costs, which are layered on top. In addition, it would tend to frustrate the goal of the government, of having an exclusive right to buy all wheat in Punjab and Haryana. Also, these developments adversely affect the interests of farmers in Punjab and Haryana. The best situation for a farmer is to have multiple buyers vying for his output. By knocking the large private corporations out of the picture, the government has reduced demand for wheat and thus hurt the income realisation of farmers.

This governments action reflects one more piece of a jittery and intellectually confused response to inflation. The government is right in worrying about inflation, as the rise in inflation over the past year has been about 3 percentage points, and the gap between macro-economic supply and demand needs to be addressed. The primary tool for this ought to be monetary policy. If the RBI focuses on this, the country could avoid the slew of distortionary government interventions in the real economy ranging from banning exports of milk powder to banning futures trading to instructing private corporations to not buy wheat in Punjab and Haryana.

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