If bureaucrats in New Delhi really possess the ability to predict wheat prices in Chicago, they should be given trading limits urgently.
They don’t have any such clairvoyance, something proved last week when the Union government reinstated a tender to import 1 million tonnes (mt) of the grain, less than a month after cancelling it. At the time, it judged the price being offered by Archer Daniels Midland Co. and Cargill Inc. to be too high.
Between then and now, the price of wheat futures on the Chicago Board of Trade has moved up to $5.72 (Rs228.80) per bushel from $5.1075, a 12% jump. On 1mt, the difference works out to $22 million.
“This is sheer mismanagement,” economists Sumita Kale and Laveesh Bhandari at Delhi-based research firm Indicus Analytics, wrote this week in their newsletter. “Surely the government should have learned from last year’s experience?”
Last year, the government was caught napping.
Back in October 2005, the state’s buffer stocks, which are used to supply the grain to fair-price shops, had dipped below 10mt, the first time in a decade that they had fallen below the level that’s considered safe.
Yet, it was only in February 2006 that India first decided to import wheat. In those four months, prices rose 17% in Chicago.
The simple truth is that markets know more than governments. Any wisdom claimed by bureaucrats is only, as economist Friedrich Hayek termed it, “a pretence to knowledge.”
This basic lesson continues to elude India’s officialdom after 50 years of disastrous state planning.
“Efficient management of business and industrial concerns is a highly specialized function and demands qualities which a civil servant is not required to, and in the ordinary course of his training may not, acquire,” Indian economist B.R. Shenoy said in a dissent note to India’s second Five-Year Plan in 1955.
Those were prophetic words.
Consider the wheat-import debacle.
On 31 May, a day after the government cancelled the tender, its wheat stock was 13.3mt. It needed about 4mt between then and 1 July to meet its norm for the required minimum buffer. There was no way this shortfall was going to be met domestically; and that was as well-known in Chicago and Kansas City as in New Delhi.
The bungling of imports is just one aspect of a bigger mess.
The Union government runs an elaborate food procurement, stocking and distribution business, trying to balance conflicting objectives. It must give a fair return to farmers and at the same time ensure low prices to consumers, especially the poorer sections of society.
Farmers don’t exactly need the government’s support in the commodity bull run. They should simply be allowed to sell to whomever they want and permitted to hedge their price risk by buying options, which remain banned.
As for consumers, the government can easily achieve the goal of helping them—minus the wastage, leakage and corruption—by monetizing its subsidy and getting out of the actual business of delivering cheap grain, sugar and kerosene.
A plan for issuing food stamps, which can be used in the open market, is going to be tested in a few districts, the Times of India reported this week. However, the report added that the government was trying to ensure that a parallel market in trading food coupons doesn’t emerge.
That, once again, shows a control mentality. There is no way a secondary market in food coupons can be avoided by diktat.
The entitlements will represent money in another form; however much the government may try to make them non-negotiable, people will trade them for cash to satisfy other needs.
If India wants to copy Brazilian President Luiz Inacio Lula da Silva’s “zero hunger” programme, it should issue stored-value magnetic cards. Such a programme will cost more initially, but it will be more efficient and effective in the long run.
The government spent $13 billion from its budget on subsidies in the year ended in March.
If this money were to be directly transferred to the people who need help, it would surely alleviate poverty. However, that isn’t how bureaucrats like to do things. They simply don’t believe people can be trusted to know what’s good for them.
The bureaucrats know everything, including the exact time when El Nino is going to turn into La Nina and an Australian wheat bounty is going to flood the international market.
In fact they know it better than weather gurus at Australia’s Bureau of Meteorology.
Since they are really that good, maybe India’s bureaucrats should demand trading limits so they can blow taxpayers’ money in style.
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