Sunday, December 27, 2009

A Food-thought for Adam Smith

Adam Smith, father of modern economist, wrote a book titled The Wealth of Nations in 1776. The book is considered the magnum opus written at the outset of the Industrial Revolution advocating a free market economy which will be more productive and beneficial to society at large.

In the book, Adam Smith wrote,
“When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay... cannot be supplied with the quantity which they want... Some of them will be willing to give more. A competition will begin among them, and the market price will rise... When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither... The market price will sink...”

To put it simply, it means when demand exceeds supply, the price goes up. When the supply exceeds demand, the price goes down.

The above law as laid down by Adam Smith is being challenged in India. The steady rise in the prices of essential commodities is not necessarily a result of law of demand and supply. There is one more element which has the potential to deceive the operating market forces: artificial food inflation.

Artificial food inflation is a creation of long chain of middlemen. The humble price of essential commodities becomes steeper by the time it reaches the ultimate consumer. The cursory glance at the current market prices of essential commodities will make one sweat. Potatoes are retailing at 100 per cent more than a year ago. Fruits and vegetables are 30 per cent more expensive than the last year. It was only when the inflation touched 19% (highest food inflation of the decade), government stepped in just to utter one phrase: that the rising prices are a “cause for concern”.

Outlook magazine has proved that the current food inflation is not a result of law of demand and supply rather it is the result of law of the middlemen. It followed the essential commodities from farm to the neighbouring shop. The survey compared farm prices, Mandi prices and retail prices of tomato, potato, cabbage and onion. The farm prices of four commodities is extremely cheap while the retail price is at at least five to six times higher. This cycle of steep price ride does not benefit millions of farmers as it is evident from the fact that farmer suicide continues to take place. It only benefits a handful of rich and powerful middlemen. This is the irony of a rising India that the price rise of essential commodities does not benefit the actual farmer rather it paves the way for the middlemen to make a booty out of it.

Where does central government stand in this artificial food inflation?

First of all, there is no effective mechanism to check whether there is the real scarcity of food grains. And even if corrective measures are taken to overcome this, there is no way to control the price of essential commodities. As Ashok Gulati, director of International Food Policy Research Institute (IFPRI) puts it,
“The value chain is too fragmented. And if there’s even a slight supply shortage, agents, end-retailers raise prices arbitrarily.”

It is the job of Sharad Pawar, Union agriculture minister, to devise and smoothen the ways in which farmers cut the long chain and sell essential commodities at decent prices. Cutting the long-chain will not only benefit farmers but also the end-consumers.

Union Finance Minister Pranab Mukherjee’s statement in Kolkata on Thursday that ‘cost-push’ element is behind the price rise is silly. He said, “It has to be understood that a cost-push element is responsible for the rise in food prices... it emerges from the Centre’s decision to give fair and remunerative prices to farmers among others [procurement, transportation and stocking prices].” Pranab Mukherjee very conveniently forgot the role played by the middlemen in the price rise. Pranab Mukherjee is no naivete who wouldn’t be aware of the role of the middlemen. One would like to believe in Centre’s sincerity behind such a measure but honestly speaking farmers are not getting much money out of it.

Prime Minister’s Economic Advisory Council (EAC) must take note of Pranab Mukherjee’s insensitive statement.

India is poised to take centre stage as it has the second largest economy after China. India Rising story has graced dozens of magazine covers across the world. We boast of four of the world’s 10 richest billionaires. But yet that does not help. That’s just one-side of the story. The other-side is ugly. Poverty and hunger are written on so many faces of Nehru’s India.

Tarun Tejpal rightly points out,
“While acquire and consume has been the anthem of the elite, a low hum has been gathering in the vast undergrowth of the country’s destitute. By official figures — and we may generously add to them if we are feeling particularly dark — more than 350 million Indians still live below the poverty line (which in itself is appalling: Rs 12 for rural and Rs 18 for urban).”

Adam Smith is no longer alive to witness the wonders of a free market. But economist Manmohan Singh is.

Sunday Inquilab, December 27, 2009

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