INFLATION something FRESH

Learning from China's mistakes

 THE GOOD thing about a global crisis is that you zoom up the learning curve at dizzying speed rather effortlessly. A country simply needs to watch its neighbours messing up and chart a wiser course. That saves time, heart-burn and costly experiments.
    Take the desperate attempts around the world to de-link consumer food prices from international markets. Only a country completely food self-sufficient, or rich enough to subsidise every morsel, can achieve it. In the normal scheme of things, beyond a point, it's impossible.
    That stage has come. Most countries, India included, have now reached point nonplus. Having exhausted the export tax/ban-free imports route, they are using crude methods such as price controls and stock limits to hack through the wild jungle of inflation. That is a huge mistake. Administrative ways to control food prices only increase consumer misery. But we don't need to commit this mistake ourselves to figure this out when there is China blundering along ahead of us.
    Spooked by a 18% climb in the consumer price index in one year, two months ago Beijing decided to use price controls to erect a great wall between local markets and the rest of the world. But that worsened shortage of food.
    For instance, cooking oil processors, which need government approval to pass on the full increase in their costs, held back vegetable oil sales while consumers hoarded the supplies they could find. Last month, 250,000 tonnes of vegetable oil stocks were released from state reserves, but the quantity was not enough to make a major price impact. China consumes about 2 mt vegetable oil a month.
    A reining back of prices in March led to a few importers to default on their purchase commitments. What's more, Beijing has to spend even more expensive oil to replace the fast-diminishing reserves. In short, price controls provoked hoarding, price volatility, trade disruption and angst. But India unfortunately appears to be in no mood to learn from China. It wants to stub its own toes rather than get alerted by Chinese consumers howling in pain.
    In his speech at a FAO ceremony Thursday, Prime Minister Manmohan Singh said he doesn't like "blind controls" to fight food prices. But he acknowledged that "pressures would mount for restrictive trade practices." Now how scary is that, especially when consequences of similar idiocy in China are staring at us in the face. Surely that should even persuade the Left as they are barking up the wrong tree.
    By imposing stock limits on traders and processors, allowing states a freehand to slam down on day-today trade, and using threats to make manufacturers (such as steel companies) cut prices, New Delhi is only causing further disruption and volatility in the supply of essential commodities.
    When retailers find themselves bound hand-to-foot by red tape, they try to wriggle free by simply refusing to sell. Since no government can force a private shop to sell or maintain adequate supplies, consumers get a rude jolt when they find empty shelves. In panic mode, they start hoarding everything from cooking oil to non-perishables such as rice and pulses. Remember that Airtel ad about a
consumer obsessively stocking up on onions because of imminent price rise? The look of fear and panic on his face becomes universal. The crisis begins to snowball. Instead of containing prices, the government exacerbates their increase.
    Frequent and ill-timed changes in customs duty have a similar effect of freezing normal trade in its tracks. To stay with cooking oil, the biggest effect of zero import duty has been to make it even more scarce in the market. Refined soyabean oil plummeted from Rs 70/kg on March 3 to Rs 53/kg on April 7. That was certainly what the government had wanted. But the unintended consequence was complete chaos in business.
    Importers with older cargoes lying at port are finding no takers because their product is more expensive than the prevailing rate. Traders are in a fix because they can't pick up cheaper stocks without first meeting their prior commitments on older contracts. Branded players cannot cut prices because their dealers have refused to sell older stocks at the new lower price and incur a loss.
    Retailers are charging the maximum printed price on every branded litre because they see this as the last opportunity to make some good profits from cooking oil. In other words, the hapless consumer continues to pay the same Rs 80/l while the entire trade chain makes a loss. It's a nightmarish lose-all situation. To add to the confusion, states have let lose their civil supplies inspectors to wield the baton at will.
    When an administrative measure prevents a business from recovering its legitimate costs, only two things can happen. It can either go underground or disappear altogether. And you won't need night-vision glasses to see this happening all around as more and more "blind controls" start making their presence felt.
    It's natural for India to try to minimise the effects of higher international prices on local consumers. Some of these actions will certainly help stabilise and reduce food prices. But the vast majority are more likely to benefit some groups at the expense of others or actually make food prices more volatile in the long run and seriously distort trade. Decisions made in real time can never be perfect. But we urgently need to learn from others' mistakes. We can't afford to makes them all ourselves.
    nidhi.srinivas@timesgroup.com