The government has raised the alarm and set up a special cell to monitor prices daily. Its anti-inflation measures include slashing fuel prices, hiking interest rates and the CRR, cutting import duties and banning exports of some essential commodities. However, such knee jerk reactions are unlikely to immediately make food and basic services available to the poor at affordable prices. Anti-inflationary mechanisms have their utility but there is also a need to revisit some other systems to make the policy more effective.
The Public Distribution System (PDS)
The government admits that PDS is a strategy for controlling inflationary pressure on the poor by ensuring the availability of essential commodities. There is a need to realign and revamp the distribution system as it suffers from endemic problems that were overlooked in the past decades. A study by the Tata Economic Consultancy Services shows that there is 32-40 per cent diversion in wheat and 27-35 per cent in rice supplied under PDS. The scheme is suffering from leakages, under weighing, non-availability and numerous such ailments and needs an overhaul.
According to the International Food Policy Research Institute (IFPRI) the leakage rate of untargeted food subsidies programs in India, Pakistan, Brazil, and Egypt is 50- 80 per cent. It is less than 3-10 per cent when food supplements are provided through targeting and identifying need-based beneficiaries. India’s Targeted Public Distribution System (TPDS), launched in 1997, suffers from identification errors and non-transparent policies. According to the study “Performance Evaluation of the TPDS” by the Planning Commission, 58 per cent of subsidised food grain does not reach the intended BPL families. Clearly, the BPL identification survey requires streamlining and the delivery system needs to be made more effective, efficient and transparent.
Futures Trade/ Essential Commodities Act
The launch of the Commodity Futures Market in India in 2002-03 has provided unrestricted entry to speculative capital in agricultural commodities trade. Such a market is meant to benefit farmers by enabling them to hedge their risk and ensure a reasonable price for their harvest. According to economist Jayati Ghosh, in reality futures trade has allowed the entry of large players into essential commodities leading to speculation and hoarding. The answer lies not in banning the trade but in setting up an effective regulatory mechanism and timely use of the Essential Commodities Act to curb speculation in grain trade.
India can also consider adapting the Inflation Targeting (IT) method, adopted by the European Central Bank among many others, under which the central bank announces a medium term inflation figure, and uses its monetary policy to steer inflation towards the decided target.