The Essential Commodities Act is essentially problematic

http://firstbiz.firstpost.com/economy/why-modi-should-scrap-essential-commodities-act-not-invoke-it-to-control-food-prices-89747.html

Perhaps it is not surprising that the Narendra Modi government has brought onions and potatoes under the Essential Commodities Act, 1955. After all, a committee of chief ministers that he headed on the issue of food prices had recommended that offences under the Act should be made non-bailable and cases should be tried by special courts.
That a committee which rooted for liberalisation of agricultural markets and reform of the Agricultural Produce Marketing Committee Acts should want an outdated piece of legislation strengthened is a bit of an anachronism, but the Indian political economy is full of such contradictions.
Yesterday’s move has come on the back of steady and rapid rise in the prices of these two items, throwing already stressed household budgets out of kilter. There have been reports of hoarding, which is what prompted the decision. But  is this the right way of going about it?
The Essential Commodities Act has its origin in a pre-Independence wartime measure - the Defence of India Rules of 1939. These were promulgated to address the problem of wartime shortages and consequent hoarding. Section 3 of the Essential Commodities Act gives the central government powers to control the production, supply and distribution of specified essential commodities listed in it. The list is drawn up after joint consultation between the centre and the states, and the latter impose stockholding limits on the listed commodities (these vary as conditions and food habits in states differ widely).
The intention may be noble – after all one cannot deny that hoarding and creation of artificial shortages does happen. The retail price of onions in Delhi has been double of what it is in the Azadpur mandi. Ahead of the Delhi assembly elections last year, tomatoes started disappearing from the market and prices headed north. Charges of hoarding were scoffed at, especially since tomatoes have a lesser shelf life than onions and potatoes, till the market was suddenly flooded with stocks and prices crashed the day after voting.
But invoking the Essential Commodities Act is problematic. Stockholding limits do not distinguish between food processing industries and food retail chains, which need to hold large stocks for their operations. Food processing industries especially need to keep stocks for a few months at a time so that fluctuating prices don’t throw their economics out of gear. But under the Essential Commodities Act, these can become liable at least for harassment. These are corporate entities with large, earmarked storage facilities which can be easily identified. So it is easy for inspectors to go after them.
On the other hand, identifying the actual hoarders is not at all easy. These may not be small traders but their operations are not corporatized and they have many avenues to spirit away and hoard supplies. The conviction rate under the Act is also abysmally low. So the hoarders go scot free and genuine players in the food economy are harassed.
The Act is not in tune with present times. It made sense at a time when the transport infrastructure across the country was poor and markets not integrated. So a production shock in one part of the country could lead to hoarding and black marketing. That’s not the case any more. Shortages in one part of the country can be countered if there is ample supply somewhere else.
So does that mean no steps should be taken against hoarding? Certainly not. The state has to step in where there is a clear case of market distortion. There is another legislation called the Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities (PBMSEC) Act, 1980 which the centre and states can invoke to check hoarders.
There is, however, a problem with this law – it is linked to the Essential Commodities Act. So action under the PBMSEC Act can only be taken against offences punishable under the Essential Commodities Act. The list of items that the PBMSEC can be invoked for comes from the Essential Commodities Act. And it is the stockholding limits under the Essential Commodities Act that defines hoarding.  It is this anomaly that needs to be addressed, not pushing more and more items under the Act whenever there is a price shock.
The Essential Commodities Act is out of tune with current realities and needs to be either scrapped or drastically overhauled to deal with crisis situations like supplies getting disrupted due to war, natural calamities and breakdown of law and order. But if even an otherwise natural reformist like Modi wants the Act to be retained and strengthened, looks like the country is going to have to live with an ineffective, harassment-prone law. And ordinary people will continue to suffer.

Modi's poochandi effect on Congress

http://www.firstpost.com/economy/quick-modi-is-coming-fear-spooks-cong-into-reform-action-1311349.html

Harassed Tamilian parents troubled by their naughty children invariably use two words to get them to behave. Poochandi varan (poochandi is coming) or poochandi koopuduta (should I call the poochandi).
A poochandi is a fictitious fearful person – I remember being told as a child that a particularly frightening looking vagabond was poochandi  - who would, children were told, take them away. The threat invariably worked – children ate their food, drank their milk, went to sleep or did whatever their elders wanted them to.
Narendra Modi seems to have had a similar poochandi effect on the Congress Party (thought it is rather difficult to think of a 129-year-old political party as a below five-year-old child). Psyched by the very real possibility of a Modi-fronted BJP coming within more than touching distance of power in 2014, the Congress and the government that it leads are suddenly in a policy and implementation overdrive, doing all that they had dithered over all these years.
Gone is the arrogant complacency; there is now a new sense of purpose. So an obstructionist environment minister is shown the door; the norms for approvals are eased; coal supplies to nine power plants have been cleared as have some port projects; and Rahul Gandhi is no longer sounding lost and confused. His focussed speech at Ficci last Saturday and a press conference on the Lokpal Bill the Saturday before that signalled this change. His press conference yesterday following the meeting of Congress chief ministers could be another sign that the party is not taking its eye off the ball. Lost in the noise over the rap that Maharashtra chief minister Prithviraj Chavan got are the four actions Congress-ruled states have been told to take to tackle price rise and reach essential commodities to the poor.
One of these is time-bound. By January 15, the states have to remove fruits and vegetables from their respective Agricultural Produce Marketing Committee (APMC) Acts. They have also been told to be strict in implementing the Essential Commodities Act (ECA) to deal with hoarders and to invoke the Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities (PBMSEC) Act, 1980 against chronic offenders. And they have to take steps to immediately implement reforms in the public distribution system (PDS) in line with the Food Security Act. Finally, Congress-ruled states have to open fair price shops run by state governments on self-help groups of women to sell essential commodities like fruits, vegetables and eggs at reasonable prices.
Clearly, someone in the Congress has finally got the message that rising prices is not something the Reserve Bank can control through higher interest rates and that supply bottlenecks have to be eased. Delisting fruits and vegetables – the items that have seen the highest levels of inflation – is a good first step in that direction. Of the 12 Congress-ruled states, three – Maharashtra (Vashi), Karnataka (Bengaluru) and Andhra Pradesh (Hyderabad) – have the largest fruits and vegetables mandis, according to the Financial Express. This move will enable framers to bring fruits and vegetables directly to the market, which will help in easing prices and bring some relief to household budgets, though some agriculture policy watchers like Devinder Sharma are skeptical of this happening. It remains to be seen if the chief ministers can take on the powerful lobbies that control these mandis merely because Rahul Gandhi has asked them to.  It will be great if they can.
The other steps Gandhi announced may not be so effective.
The Essential Commodities Act (ECA) is dusted out and deployed every time the inflation dragon rears its head, but its effectiveness is somewhat doubtful. Both its critics (who want it scrapped) and supporters (who want it to continue) agree that the ECA has not been able to check price spikes whenever there is a shortage of some food item. On the other hand, it is implemented in a ham-handed manner and often becomes a tool for harassment. 
The logic behind setting up more fair price shops to sell fruits and vegetables is not clear. If these items are delisted from the APMC Act, and if silly rules don’t hamper hawkers and street vendors, the cooling effect on prices will make such steps redundant. Special outlets work only during times of price spikes. In Delhi, for example, government sales outlets were set up to sell onions at cheaper rates. Unless this is a way of doling out shop licences ahead of the elections.
The PDS reforms will take time to pan out. They have more to do with improving the last mile of the PDS chain – transporting food grains from godowns to fair price shops and then to the consumer – to eliminate diversion. This requires the deployment of technology – Aadhar, digitization of ration cards and list of beneficiaries, smart cards, use of GPS and SMS to track movement of food grains, to name just a few. These can’t be done overnight.
Questions naturally arise about the haste that is driving the flurry of decisions and actions. Are decisions and actions being pushed through without enough thought going into them, just like the Lokpal Bill was passed without sufficient discussion? Could these then lead to more problems some months down the line – when the Congress isn’t around to deal with them? These are questions that need to be asked and answered.
There are reports that Veerappa Moily, as environment minister, may give the go ahead to GM crops. The hyper-active and obstructionist green lobby has been red-flagging this and had managed to persuade the previous two ministers, Jairam Ramesh and Jayanthi Natarajan, to block field trials. But in overturning these, are essential precautions – that are in place in countries that have embraced BT foods – being given the go-by? When easing environmental norms for large industrial projects, are necessary safeguards being junked?
Is the fear of the Modi poochandi leading to rash decision-making?
Actually, it was the Congress and those whom economist Arvind Virmani calls the LIMPs (Leftist Intellectuals, Media and Politicians) who first portrayed Modi as poochandi. Except that they used the H-word from Europe of the 1930s. Poochandi varan, they warned the public, pointing to 2002, fake encounters, Haren Pandya’s murder, the snooping controversy and a lot more. Your freedoms will be jeopardised; your lives will be in danger, they all warned. But the public didn’t get spooked.
I remember a young cousin turning the poochandi tables on my grandmother once. Should I call the poochandi, she asked, when my grandmother did not do something she wanted. It was a sign that she wouldn’t be frightened any more.
Voters in four states have, in effect, shown that they are not going to be frightened into not voting for the BJP. They, too, have turned the poochandi tables on the Congress.
Whether the poochandi comes or not is immaterial. What matters is the effectiveness of the threat. It is the Congress that is now being spooked into action. Someone now has to ensure that it is the right action in the right direction.

Inflation needs a political solution

http://www.firstpost.com/economy/politicians-hold-the-key-to-taming-inflation-dragon-1298845.html

So, India’s central banker Raghuram Rajan did not hike rates on 18 December, even though both wholesale and retail inflation persisted at elevated levels. The man who was expected to act like a hawk, is being panned for behaving like a dove, taking a benign attitude to inflation.
Rajan made it clear that he is not comfortable with such labels and that, far from being soft on inflation, he was keeping a close eye on it. If inflation did not ease, he said, he would act appropriately. Maybe he had a problem with the choice of birds, and would have preferred to be compared to the wise owl instead.
Will inflation – particularly food inflation – ease over the next month? Given that general elections are due in a few months, the government and the Congress Party will certainly hope that it will. The results of the recent assembly elections made it very clear that the public will be unforgiving about rising prices. However, opposition parties would do well not to gloat about the government’s plight. What India is seeing today is not a cyclical or seasonal high inflation that will correct itself. High inflation, especially food inflation, has got entrenched and is not likely to go away soon. It is certainly going to pose a huge challenge to whichever government comes to power in May 2014. And there is no quick solution for it.
The persistent high inflation that we are seeing now is an economic problem created by politics. The solution, too, is rooted in politics. The UPA cannot escape the blame for the current high inflation. The unchecked populism during its ten years is mainly to blame. Finance minister P. Chidambaram admits that higher farm gate prices and higher rural wages (thanks to the NREGA effect) had played a role in rising inflation. But he justified both decisions as being right. “The argument that inflation must be contained by suppressing farm gate prices or rural wages is a specious argument that ignores the needs of the poor and deserves to be rejected,” he said at the Delhi Economics Conclave in mid-December.
It is by now well established that the rising food inflation is the result of increasing demand, thanks to growing prosperity, far outstripping supply. This statement, however, needs to taken with a bit of caution. While expenditure on fruits and vegetables (which has seen the highest levels of inflation) grew by 42 percent between 2004-05 and 2011-12, data from the National Horticulture Board shows that production increased 53 percent. Dr Ramesh Chand, director of the National Centre for Agriculture Economics and Policy Research (NCAP), explains this discrepancy, pointing out that given the huge increase in demand even a marginal fall in production in some months has a huge multiplier effect on prices. This becomes more marked in vegetables that lend themselves to hoarding – potatoes, onions and tomatoes, which have almost become necessities now. So clearly, there is a supply bottleneck issue that needs to be addressed. For this, traders and the entrenched cartels in farm goods are to blame.
How is this to be tackled? The solution is an economic one – liberalising and bringing in more competition into agricultural trade. But politics is not letting it happen.
The issue of monopolies and cartels in agricultural trade has to do with the state-level Agricultural Produce Marketing Committee (APMC) Act which set up regulated zonal wholesale markets to which farmers in a particular area are bound to sell their produce. This not only encourages monopolies, but also stands in the way of the integration of farm production with the national market. According to an ICRIER report on the non-alcoholic beverage sector, even in cases where food processing firms buy produce directly from the farmers, they have to pay the APMC cess.
There is near-unanimity that the APMCs need to go or at least be modified to allow more competition and that a barrier-free national market is the best way to tackle food inflation. Unfortunately, this is something that is solely in the realm of state governments. A model APMC Act, which allowed for more competition, was drawn up by the Centre during the National Democratic Alliance (NDA) government. During the NDA and the UPA reign, there have been attempts to prod states to adopt this model legislation. A committee of state ministers in charge of agricultural marketing has unanimously endorsed the need to adopt the model Act. And yet, only 17 states have done so. So strong is the political hold of the vested interests that control these markets.
When food inflation started heading northward in 2002-03, the NDA government cooled prices by releasing part of food grains stocks through the public distribution system and selling grains at cheaper rates to millers. The government is sitting on huge food grain stocks, but it is wary of offloading this because of the requirements of the Food Security Act. Can the damage be contained? There is a provision in the legislation to move to a system of cash transfers, which will obviate the necessity of huge public stockholdings. This is again a political call that either the present or future governments will have to take. Do parties have the gall to take this route? Remember that this unwise piece of legislation was green-lighted by all parties.
Former finance minister Yashwant Sinha recently recalled an anecdote from his tenure about the finance minister of a northern state losing his temper when the Union finance secretary suggested that states abolish a tax on trade in food grains in order to keep food prices down. For the minister, filling up his state’s coffers were more important than the larger macro-economic implications of rising food prices.
When politicians across the country and across parties refuse to see economic logic, can there be an easy solution to the inflation problem? There is no point drawing comfort from the fact that high inflation is being driven by food prices and that core inflation is largely at acceptable levels. As C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, has warned, sustained food inflation gets generalised and spreads to other sectors. Given the current levels of distortions in the marketing of food grains, cereals and fruits and vegetables, high food inflation is unlikely to be a temporary phenomenon. Rajan, at his press conference on Wednesday, clearly said that the RBI could not indefinitely wait for the supply side to catch up with demand pressures on the food front and that if necessary, he would take steps to bring demand closer to supply. That is obviously the only solution that will be left.
But just because inflation targeting is one of RBI’s mandates, is it justified to put on it the entire onus of solving a problem that is not of its creation in the first place? In doing that, isn’t the political class that is responsible for the situation being let off the hook? Won’t the use of monetary policy to address a supply-side problem lead to other problems? These are questions all political parties need to mull over. It is time inflation is seen as a political problem requiring political solutions. The structural problems cannot be addressed overnight. The benefits also will take time to materialise. If any new government does not take action early enough, five years down the line (or even earlier during elections to state assemblies) it will find itself in the same situation as the UPA.
In October 2012, when Rajan’s predecessor D. Subbarao hiked rates to tackle inflation amid fears that it would hurt growth, a miffed Chidambaram had said he would walk alone if necessary to face the challenge of growth. Chidambaram or whoever the finance minister will have to walk alone to address the challenge of inflation. At any rate, they can’t expect the RBI governor to walk alone on this issue. They – and the entire political class – will have to support him.

Reforms RIP

So the Left has finally withdrawn support. In any other circumstance, that would have been reason to celebrate. But if its place is going to be taken by the Samajwadi Party batting for one industrial house (see my previous posts below) then there's not much cause to cheer. One blackmailer has been replaced by another. The latest is that Mulayam Singh wants his nominee for the post of CBI Director. The more things change, as they say....

What's amusing is the unanimous reaction that this will help revive the stalled economic reforms process. True, the Left has been the most strident of the opponents of economic reform, but it would be wrong to say that the Communists the only opponents of liberalization. There are many others who will not allow crucial reforms to be effected. These sections are not just ideologically driven political parties but a slew of vested interests - politicians (cutting across the political spectrum), bureaucrats, middlemen (who operate through politicians). The Left has been stupid in revelling in the label of anti-liberalisers. It has generated all the sound and the fury, but its opposition has been less effective than that of these groups, who have operated quietly in the background and let the Comrades take all the blame. To that extent, the Left has allowed its principled opposition to be used by manipulators.

The Left was hardly in the picture during the six years of the BJP-led NDA rule. But still a lot of reforms were stalled (though that government did manage to get far, far more done than the UPA has). Some of the stalling was done by parties that are part of the UPA now.

Remember also, that there is a sizeable section within the Congress that is opposed to any liberalisation. The socialist lobby within that party - Arjun Singh, Mani Shankar Aiyar, are its more well known members - can hardly be discounted.

The process of economic liberalisation reduces government meddling in the economy. In doing that, it also removes the power of patronage from politicians and bureaucrats and reduces the scope of corruption. It also reduces the role of middlemen. So all these groups are hurt by economic reforms, far more than the poor are (actually reforms are the only way to help the poor, but how and the costs will have to be the subject of another post). But it is in the name of the poor that the reforms are stalled. Then, of course, there is industry. Every established player in a business wants to restrict competition - the essence of market-driven economic policies - so that it enjoys a monopoly.

Let's look at a few pending economic reforms.

Agriculture. The economy's largest private sector is also the most regulated one. Sure the sector needs a heavy dose of public investment, but it also needs an equally strong dose of market-oriented economic reforms. The current policy regime, the large farmers benefit more than the small and marginal ones, who are in a pitiable state. One of the key reforms is the relaxation of the state-level Agricultural Produce and Marketing Committee Acts to allow competitive markets to come up. But that will significantly reduce the clout of the arthias and get farmers a fair return for their produce. So movement on this is slow. The arthias and the large farmers are the ones with money and clout in the rural areas. They are the ones who can bankroll politicians; not the small farmers in whose name the politicians act.

Privatisation. Why the government needs to be running a whole lot of businesses - airlines, hotels, to name the more ridiculous ones - is beyond understanding. The opposition to privatisation comes from powerful employees' unions (many of them affiliated to communist parties, yes) as well as politicians and bureaucrats. It is no secret that politicians and bureaucrats milk PSUs. The existence of PSUs also gives them power and patronage. All these will disappear once they are privatised. Recall that the so-called liberaliser Chandrababu Naidu had no compunction in opposing the privatisation of Rashtriya Ispat during the NDA regime because the PSU is located in Vishakhapatnam in Andhra Pradesh and he didn't want to face the political backlash of people being rendered unemployed (never mind that a handsome VRS package was built into all privatisation deals).

Retail. Don't for a moment think that only the Left is opposed to the entry of foreign retailers. Large domestic retailers are working behind the scenes to ensure that Walmart and Carrefour and Tesco don't come in. There is also the small retailers lobby which is now opposing all organised retail. Small retailers form a large chunk of the BJP's support base, so opposition will come from there too.

Freeing up petroleum pricing. The NDA initiated the dismantling of the administered pricing mechanism in line with the Kelkar committee report. But it was NDA petroleum minister Ram Naik who started meddling in pricing again. Of course, Mani Shankar Aiyar carried it further. Petroleum products pricing is a highly emotive issue and few politicians are willing to see reason on this. Opposition to this will come regardless of who is in power and whether or not the Left is supporting the government.

Aviation. Foreign airlines cannot invest in Indian airlines (though foreign funds can) or operate in the local market. Yes, the Left is behind this. So are powerful Indian airlines owners.

Foreign investment in media (my industry). Again something the Left is vocal about. But powerful media groups will not allow this.

But above all, remember, this is an election year. Despite clear evidence that sensible economic policies reap political dividends, no party is prepared to take hard decisions in the run up to elections. In the mid-1990s, Narasimha Rao and Manmohan Singh stopped the reforms process they initiated in 1991, because the Congress lost several state assembly elections and this was blamed on reforms. The NDA in its last year in government removed a sensible finance minister like Yashwant Sinha and stalled reforms. This government will do the same.

So it hardly matters if the Left supports the government or not. Reforms will go into a limbo till the next general elections.