Tuesday, December 28, 2010

Politically motivated borders of Indian States

The economically motivated community like investors both public and private sector; the Indian State is a boon for their market, no matter what they produce and where they produce and sale. If they change their strategies as per the requirement of their local market they can sale anything! 

  • Taking again the example of pulses not traded in the futures market, and considering their daily price volatility over a two-month period in 2009, we find unexplainable abrupt jumps in spot prices. For example, the July 16 announcement by the State Trading Corporation to import pulses made tur spot price jump by close to 68% and urad by 37% in one day in the Delhi wholesale market!  
  • In the name of food security, the borders separating Indian states are as stringent in movement of agri-commodities at international borders. Within the political boundary of each state, trade in agri-commodities is subject to a plethora of regulations and taxation, not least of which are those under the APMC Acts. It also builds up costs of intermediation leading to cost-push food inflation, especially during food underproduction like that witnessed in 2008. 
  • While augmenting supplies is a goal achievable only in the long run, steps to remove the panoply of state level regulations binding agri-commodities trade would enable creation of a pan- India market, leading to faster and efficient movement of these goods. This would debottleneck the agriculture supply chain and bring down intermediation costs.  
  • There are no silver bullets to tackle the demon of food inflation. But targeting futures markets is not just barking up the wrong tree, but also counter-productive as evidenced in commodities such as pulses. An immediate step in managing food inflation would be to strengthen the market institutions that transmit market information in an effective manner so that agri-commodities are passed on to consumers with minimal risks which can be absorbed by the system.  
From Mystery behind food price spiral by Naveen P Singh

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