Busting economic superstitions

These are testing times. In India as across the world, food prices are rising along with prices of all agricultural products. As soon as economic events get bad, superstitions about the economy come out of the woodworks.

The primary superstition is that prices are high because traders make them high. They are hoarding and speculating. In every community, the trader is seen as the first enemy to attack.

In Uganda, it was the Indian trader who was ejected by Amin when he had made a mess of the economy. Jews were also victimised for the same reason. 

India is reputed to have the smartest team of economists in government — Team Manmohan.  But they are under populist pressures from the left wing ‘friends’ of UPA. Thus, traders have come under suspicion.

The very word ‘commodity exchange’ sounds American and therefore imperialist and therefore anti-Indian. So despite a lot of sound work by economists over the last 50 years exposing the fallacies about the effect of trading, there are ‘economic advisers’ who are shouting for a ban on forward trade.

The messenger just brings the bad news; he did not create it. Markets respond to underlying forces of demand and supply. They cannot create them.  And every hoarder can only make money eventually by selling, thereby bringing the price down.

None of this will change the determination of the ‘progressives’ to ban trading, clamp down on the traders, discredit Team Manmohan and hope to get a radical reversal of the last 17 years of successful liberalisation.

In her early days as PM, Indira Gandhi nationalised wholesale trade in food grains; after a few months of chaos she had to reverse it. Given the election hysteria, I would not put it past some people to start that hare running.

What is not said by anyone is that a lot of food is wasted in storage which is old and inadequate. For all the resistance to FDI in retail trade, no one understands that small traders cannot afford to finance good warehouses. The Food Corporation of India is not only a useless white elephant, but contributes to wasted food stocks due to its bad storage. If India had a decent corporate food distribution network, the  almost 10 per cent food stock which rots in godowns would be retrieved.

Farmers would not lose money due to wasted food stocks and delayed deliveries. Consumers would gain from safe and healthy packaging and delivery of food.
But no. Poor consumers and even poor farmers have to suffer because of populist fallacies about the evils of private sector trade.

Food prices have suddenly gone up around the world. Indeed one can see a 30 year cycle in food prices. The last time prices were high was during the early 1970s. Prices came down from then on due to better productivity in agriculture and new sources of supply becoming feasible thanks to container ships.

But last 20 years have also been a single long boom in income growth in Asia and much of developed world. People whose  incomes have gone up especially in Asia are eating more and demanding better cereals and vegetables.

Demand has thus outstripped supply. GM foods have not taken off as much as they should have. Those who could see these developments early on have been betting in futures markets that prices would go up.

Last year the agriculture minister who cares more about 20/20 than about the price of food made a hash of placing an order for wheat and then cancelling when price came down temporarily only to have to reverse it. May be this year if he gets his attention away from the cheerleaders at IPL, he will do something about food stocks.

The panic about inflation may explain the sudden explosion in the speculation about Rahul Gandhi. Sonia Gandhi is a fighter and a survivor. She also will  remember what happened to the other Mrs Gandhi when faced with food price inflation. So the media are being softened up about Rahul becoming prime minister.

Nothing has been decided yet which is why she blows hot and cold on these speculations. Arjun Singh and Pranab Mukherjee hate Manmohan and wish to get rid of him. Yet they know that they can’t be PM. So the proxy fight is via Rahul.

Manmohan Singh is a genuinely selfless politician who would vacate the gaddi for the yuvraj the minute he is told to. Sonia Gandhi is a shrewd calculator and she will wait till after the harvests to see if prices come down enough to salvage UPA’s chances of winning the election.

If there is some easing of inflation, as I expect, there will be no change. But if inflation persists, then the Left’s knives will be out. They hate Manmohan for the US nuclear deal and will go along with the crowning of the yuvraj.  When William Pitt became prime  minister at 24, the Morning Herald printed a doggerel
A sight to make surrounding nations stare
A  Kingdom trusted to a school boy’s care.

Rahul is older than Pitt but hardly better prepared to be prime minister. Yet that is the gamble being contemplated now by the most shrewd politician in India — his mother.

The writer is an economist