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It’s not a demand-supply mismatch alone that has resulted in spiralling prices. Speculative trading is the real culprit. But is the UPA bothered? Sitaram Yechury writes.india Updated: Mar 03, 2011 12:40 IST
Left Hand Drive is entering 2011 with a sense of deep disquiet. For many moons now we have been preoccupied with discussing the immediate. The nuances of music, adventures in the outer space, the progress of the Hadron Collider or the dialectical unity of opposites of zero and infinity have on occasions been the subjects of this column. The maze of current developments — corruption, inflation, leaks of conversations exposing the nexus among sections of politicians, bureaucrats, businessmen and corporate media — compels us to limit our discourse to searching ways out of this maze.
Take the issue of the relentless rise in the prices of essential commodities pushing additionally millions to survive below the poverty line (BPL). The utter callousness of the government is reflected in the fact that instead of providing any tangible relief, it has again permitted the hike in the prices of petrol — the second substantial hike within a month — which is bound to fuel inflation further.
Far from suggesting any measures to provide relief, the statement issued by the Prime Minister’s Office following the Cabinet meeting to discuss ways to control this runaway inflation states that the price rise “is the result of fast growth of the economy, leading to rising income levels, combined with the effect of several inclusiveness programmes which put greater income in the hands of the relatively poor whose food consumption increases”.
Like George Bush who blamed increased consumption by Indians for the global food price rise in 2007, the deputy governor of the Reserve Bank of India has stated that a 39% rise in income per person in the previous five years has created an extra 220 million regular consumers of essential commodities.
Where the benefits of ‘fast growth’ go was obnoxiously exposed in the recent auction of cricketers for the Indian Premier League (IPL). IPL India shines while BPL India groans.
It would be wrong to conclude that the cause of the current price rise is a supply-demand mismatch alone. Take the example of onions in Delhi. Alarmed at the astronomical rise in the prices of onions, its supply was nearly doubled from 730 tonnes on December 20, 2010, at the Azadpur Mandi to 1,144 tonnes on December 21. The wholesale price fell from R55 to R50 per kg while the retail price increased from R75 to R80 per kg. Clearly, there is more to this price rise than mere supply-demand mismatch.
In the last nine months of 2010, the wholesale price index for vegetables rose by 67%. Retail prices have soared much higher, making chicken cheaper than onions! Marie Antionette, whose apocryphal remark during the French Revolution about why people couldn’t eat cakes if they weren’t getting bread, would have been a happy person in today’s India.
What happened with sugar prices in the beginning of 2010 is happening with onion prices at the beginning of 2011. Exports were encouraged through incentives despite warnings that there could be shortfall in the supply of these commodities. When prices started to soar, exports were banned and imports were encouraged by eliminating all import duties. Yet the prices didn’t climb down. The same traders who benefited from export incentives are now benefiting from duty-free imports. Is this a reflection of the bizarre ways of the government or is there another scam waiting to unfold?
Over the last nine months of 2010, the cumulative value of trade in the commodity exchanges in the country rose by a phenomenal 51.37% to stand at more than R78 lakh crore. The cumulative value of trade in agricultural commodities alone rose by nearly 8% to stand at more than R9 lakh crore. The rise in the value of trade in the forward markets obviously reflects high profitability.
Now, any forward trading can make profits only when the prices of these commodities are higher than what they were when the trading initially took place. People are paying higher prices to feed such profits. It is this speculative trading that is relentlessly pushing up the prices of all essential commodities, particularly food prices.
With the current global food prices breaching 2008 levels, it’s important to underline what the UN Special Rapporteur examining the price rise in 2007 and 2008 says:
“A significant portion of the increases in price and volatility of essential food commodities can only be explained by the emergence of a speculative bubble. In particular, there is a reason to believe that a significant role was played by the entry into the markets for derivatives based on food commodities of large, powerful institutional investors such as hedge funds, pension funds and investment banks, all of which are generally unconcerned with agricultural market fundamentals. Such entry was made possible because of deregulation in important commodity derivatives markets beginning in 2000. These factors have yet to be comprehensively addressed, and to that extent, are still capable of fuelling price rises beyond those levels which would be justified by movements in supply and demand fundamentals. Therefore, fundamental reform of the broader global financial sector is urgently required in order to avert another food price crisis.”
Unless such speculative trading is banned, the excess foodgrain stocks rotting in central government godowns released to states for sale through the public distribution system, and budgetary hikes in the prices of petroleum products rolled back, no relief for the aam aadmi is possible.
Sitaram Yechury is CPI(M) Politburo member and Rajya Sabha MP.
* The views expressed by the author are personal.