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Heads you win, tails I lose

Apr 11, 2007

The Indian government comes very close to being an Orwellian nightmare - its spheres of influence are all pervasive. Unfortunately, foresight is not one of its focal strengths, and so we the common people have by now gotten used to lurching from one crisis to another. The melee on agricultural production is a case in point. Initially, the central government was sanguine about the wheat production estimates for the 2006 rabi crop although all the state level approximations fell quite short of the central government number. When the crop came into the 'mandis', there was not as much of it as the <>Food Corporation of India (FCI) was led to believe. It is not equipped to deal with competition as, for all these years, the government has been the sole buyer and thus has set prices as it thought fit. With the entry of ITC and Cargill, it (FCI/government) scrambled hard to get whatever it could, and raised prices, a very natural economic reaction. When it showed up in the inflation indices, the complacency vanished to be replaced by a public anxiety about wheat availability.

The government machinery seems to be unacquainted with the 'rational expectations' theory, one of the most beautiful ways of trying to quantify changeable human responses. It should have been evident that, with higher wheat prices, more farmers would sow wheat for the next season. As agricultural supply has a short gestation period (thank god for small mercies), this years' rabi crop has proven the government's forecasters wrong yet again, but now by surpassing their estimate.

There are two lessons for us in this, a) the government is not fit to play the role of 'market'; b) this futile exercise could have been avoided completely if the futures market was developed enough as it would have given prior notice to all players about the impending expectations.

Now when we think we can heave a sigh of relief about most Indians being able to eat their 'roti' in peace, another problem is looming large, and the government has yet not shown its ability to learn from history. If we dig further into this phenomenon of a higher wheat harvest, we can see that it is not due to any second green revolution that has improved yields. Instead, the farmers' natural response to higher wheat prices was to shift land use patterns from oilseeds to wheat. To add fuel to fire, the government has reduced import duties on edible oil, making oilseeds production all the more unviable to the Indian farmer.

Imports are cheaper, so let us specialise and let nature take its own course, Adam Smith would have us say. In any case India's self-sufficiency level in edible oils has gone down to approximately 60% from 97% in the last 13 years. But the oil imported is the palm oil variety. So if your palate demands your food to have the age-old traditional flavour of freshly pressed mustard oil, you will have to pay higher for these gastronomic bourgeois attitudes.

However, with oilseeds being pressed (!) into producing more bio-diesel, international prices too are on the upswing. So fond hopes of evening out of supply shocks on the volatile Wholesale Price Index (WPI) seem too premature. Already, in expectations of a bad season, the Solvent Extractors Association (group of oil manufacturers in India) says that groundnut oil prices have risen 50% over April 2006. Overall, the vegetable oil availability is 4% lower in FY08. And edible oils and derivatives account for 6.9% of the weight in the WPI as compared to 1.4% of wheat. Some food for thought!

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