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Price rise may lead to hoarding; no govt check on cartelization

Price rise may lead to hoarding; no govt check on cartelization
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First Published: Sun, Apr 06 2008. 11 04 PM IST

Updated: Sun, Apr 06 2008. 11 04 PM IST
New Delhi: Statism may not be the only trend of the 1970s and 1980s that resurfaces as the ruling Congress-led United Progressive Alliance (UPA) battles inflation which is at a three-year high; black marketing and hoarding could be next in line.
That could pose a serious challenge to the UPA which is preparing itself to face a series of nationwide protests highlighting its inability to contain prices, beginning with a week-long campaign in state capitals today by the principal opposition, the Bharatiya Janata Party, or BJP.
The government’s response to inflation, which touched 7% for the week of March 22 in terms of an increase in wholesale prices, includes reduction in import duties of several products, limits on trading of others, and caps on prices of still others.
According to an analysis of retail price data of 14 essential products by the ministry of consumer affairs, the maximum surge in food prices has been in New Delhi, followed by Kolkata, Mumbai and Chennai.
Last week, the government urged steel and cement manufacturers to reduce prices of the products. These commodities, such as foodgrains have a strong tendency, if the experience up to the early 1990s is any indication, to disappear from regulated markets and be transacted in parallel, unofficial markets.
On Sunday, the Press Trust of India said in a report that the government could consider placing steel within the purview of the Essential Commodities Act, a year after excluding the product from the ambit of the law which essentially allows the state a say in pricing and supplies. The agency did not reveal the sources of this information.
Gentle twist: Pronab Sen, India’s chief statistician, says the government can still check black marketing and hoarding by adding or deleting sensitive commodities from the Essential Commodities Act. (Photo: Harikrishna Katragadda/Mint)
“Recent stock limit control and (mandatory) reporting on purchase of wheat to (the) government may help it keep hoarding at bay. Otherwise, there are strong chances of (this), especially now with heavy rainfall in north India (because of which the) wheat crop may get damaged just before the government starts procuring,” said S. Raghuraman, head of trade research at Agriwatch, a website focused on commodities.
Arguing similarly, an economist who works closely with the government and hence did not wish to be identified, said: “Definitely, it will encourage hoarding. There is no need for a knee-jerk response (from the government to inflation). The current round of inflation is not structural and hence will pass. Now, if the government reacts by pressurizing RBI (Reserve Bank of India) to raise interest rates, then growth would definitely be hurt.”
To check companies from hoarding wheat, the government wants individuals and companies to declare to their respective state governments any purchases of the commodity exceeding 10,000 tonnes after 1 April.
Analysts also say that steel and cement companies may form a cartel and mark up prices once the government eases up on its anti-inflation campaign. This, they add, could result in another round of price increases by affected companies in industries that depend on these products.
Currently, the government does not have an effective mechanism to check cartelization.
The Competition Commission of India, or CCI, the agency that is required to check monopolistic practices and cartelization, is not yet functional although it has been notified (that means it exists as far as the government is concerned, although it still isn’t up and running). For instance, CCI has still to get the required sanction for manpower to deal with cartelization cases.
That doesn’t seem to be the problem with the government’s ability to fight black marketing and hoarding. Pronab Sen, India’s chief statistician, said that the government is equipped to do this.
“Within the Essential Commodities Act the government can add or delete commodities that are sensitive, which itself can be an effective tool to check such activities. Besides, the government has other administrative mechanisms— don’t forget, arm-twisting can be done in a gentle way also,” Sen added.
Sen said that the government’s efforts to get cement and steel makers to lower prices will not hurt the companies.
“In two months, the lean period in steel as also cement will begin due to monsoon and will continue till September. Prices anyway go down during the lean season, so the industry does not have much to lose,” he added.
Sen also said that the cement industry would anyway not be able to maintain the kind of high prices it has done in the past few years because additional capacity, work on which started in 2006, will come into the market soon.
Inflation has become a key political issue, especially with a little more than a month to go for the assembly elections in Karnataka. This will be followed by a series of polls to other state assemblies before elections to the Lok Sabha in early 2009.
Rajiv Pratap Rudy, a national spokesperson of the BJP, said: “The Centre’s threats against black marketing and hoarding are nothing but an admission that it is not sure of its fiscal or monetary measures. The inflation inferno is set to raze down the UPA government.”
Mohammad Salim, a Lok Sabha member of the Communist Party of India (Marxist), or CPM, said the government had tragically mistaken piecemeal measures for a holistic policy to deal with inflation.
“The taste of the pudding lies in the eating. And hoarding is something the government cannot stop. In fact, hoarding might even increase unless the government takes concrete steps to ensure food security for all,” Salim added.
“If reasonably priced food supplies are guaranteed for the overwhelming poor sections of the population by the government, hoarders will not have any incentive to keep on hoarding. But that can’t be done unless the government strengthens its procurement policy and the public distribution system (PDS),” he said.
The CPM had earlier given the UPA government at the Centre time until 15 April to bring down prices of essential commodities.
The largest of the four Left Front constituents that support the government without being part of it has threatened to launch a countrywide agitation against rising prices if this isn’t done.
Its partner in the Left Front, the Communist Party of India, too, plans to hold nationwide protests against the rise in prices on 17 and 18 April.
Veerappa Moily, a former chief minister of Karnataka and chairman of the Congress party’s media cell, said there was no reason to panic as the government could take more measures to check inflation.
“The government is addressing the issue and studying all aspects of the problem. For example, the impact of the futures market on speculative trading and hoarding can be analysed. The measures taken by the government will certainly have an impact,” Moily added.
According to Sen, supplies of foodgrains will improve once wheat reaches the market as the government estimates a production of 76 million tonnes this season. “In fact, the outlook on entire rabi (winter) crop is positive,” said Sen.
An official at the Commission for Agricultural Costs and Prices (CACP, the body that fixes and monitors prices of products sold though the PDS) said they were still assessing the impact on prices of PDS items of the export bans on rice and pulses and the cut of import duty on edible oils.
In the PDS, households above poverty line, or APL, are sold rice at Rs10 a kg, while those below poverty line (or BPL) are sold rice at between Rs6.20 and Rs6.50 a kg; very poor households get rice at Rs3 a kg.
APL households get wheat at Rs6.80 a kg; BPL households at Rs4.65 a kg; and very poor households at Rs2 a kg.
“These prices are to continue in these categories for the time being, although the procurement and distribution situation is being monitored as of now. Under the current conditions, relaxation of availability of some of these items for APL categories, such as sugar, will not take place,” said V.M. Jadhav, member, CACP.
PTI contributed to this story.
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First Published: Sun, Apr 06 2008. 11 04 PM IST