11 SEP, 2012, ET BUREAU
While India frets about coal block allocations, massive policy failures have hit people where it hurts most: the stomach. While granaries are overflowing and sugar piling up, one would have expected the prices of sugar and flour to fall, or remain stable.
Instead, since mid-July, wheat prices are up 20% across the country and flour prices have also shot up. For sugar, whose prices are up 12% from mid-July, the situation is even tougher to explain: in the same period, world sugar prices have collapsed 15%.
There is no dearth of sugar at home either: supplies are up from 51 lakh tonnes in 2009-10 to 61 lakh tonnes in 2011-12. Simple economics cannot explain these price hikes. Other forces, like state politics, venality and ineptitude are at work here.
India has powerful sugar lobbies in the states of Maharashtra — where the government has to balance between cane growers, inefficient mills and traders — and Uttar Pradesh, where mills are larger but farmers are vocal and wield lots of clout. Probably under pressure from these states, food minister K V Thomas slapped a 10% import duty on sugar in July this year, ending a three-year zero-duty run for the sweetener and causing prices to spike at home.
Wheat inflation is even tougher to explain when one considers that India's stocks of the grain now stand at a record 50.5 million tonnes, up from around 33 million tonnes two years ago. But there are reasons why these stocks cannot drive down prices.
First, venal officers in state food administrations ensure that lots of grain procured for the poor is, instead, sold into the market by politically-connected traders. Second, some of the grain rots in storage.
Third, government procurement sucks out most of the wheat from the market, leaving little for millers. Finally, the food administration is now so inept and venal that it has no capability to run an efficient distribution system.
Given that, we need massive reform in our food administration, including an overhaul of the Food Corporation of India, financial inclusion and a shift from physical subsidies to direct cash transfers.
And as for sugar, the government should start by removing the import duty and opening sugar to global trade.
While India frets about coal block allocations, massive policy failures have hit people where it hurts most: the stomach. While granaries are overflowing and sugar piling up, one would have expected the prices of sugar and flour to fall, or remain stable.
Instead, since mid-July, wheat prices are up 20% across the country and flour prices have also shot up. For sugar, whose prices are up 12% from mid-July, the situation is even tougher to explain: in the same period, world sugar prices have collapsed 15%.
There is no dearth of sugar at home either: supplies are up from 51 lakh tonnes in 2009-10 to 61 lakh tonnes in 2011-12. Simple economics cannot explain these price hikes. Other forces, like state politics, venality and ineptitude are at work here.
India has powerful sugar lobbies in the states of Maharashtra — where the government has to balance between cane growers, inefficient mills and traders — and Uttar Pradesh, where mills are larger but farmers are vocal and wield lots of clout. Probably under pressure from these states, food minister K V Thomas slapped a 10% import duty on sugar in July this year, ending a three-year zero-duty run for the sweetener and causing prices to spike at home.
Wheat inflation is even tougher to explain when one considers that India's stocks of the grain now stand at a record 50.5 million tonnes, up from around 33 million tonnes two years ago. But there are reasons why these stocks cannot drive down prices.
First, venal officers in state food administrations ensure that lots of grain procured for the poor is, instead, sold into the market by politically-connected traders. Second, some of the grain rots in storage.
Third, government procurement sucks out most of the wheat from the market, leaving little for millers. Finally, the food administration is now so inept and venal that it has no capability to run an efficient distribution system.
Given that, we need massive reform in our food administration, including an overhaul of the Food Corporation of India, financial inclusion and a shift from physical subsidies to direct cash transfers.
And as for sugar, the government should start by removing the import duty and opening sugar to global trade.
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