First the good news: India's inflation rate dropped substantially in August. Now the catch: the fall was due mainly to a change in the basket of commodities used to measure inflation. The government's new index curtails the impact of food prices, which have been worryingly high for the past couple of years.Â
The Department of Food and Public Distribution's annual report reveals the irrational policies behind the nation's current food problem. The government's procurement of grain rose from 34 million tons in 2006-2007 to 57 million tons in 2008-2009; the minimum support price for wheat was hiked from Rs.650 per quintal to Rs.1000; the MSP for rice went from Rs.580 per quintal in 2006-2007 to Rs.950 in 2009-2010. The distribution of grain, meanwhile, barely budged, leading to an expansion in buffer stocks from 17 million tons in January 2007 to 47 million tons in January 2010. Storage facilities did not keep pace with the ballooning grain reserve. Remarkably, the total warehousing capacity owned by the Food Corporation of India, the Central Warehousing Corporation and the 17 State Warehousing Corporations actually fell between 2003 and 2010. The result of this mismanagement: millions of tons of grain rotting while most Indians can't afford proper meals. Not to mention an exploding food subsidy burden: the 23,000 crores spent in 2006-2007 seem puny compared with the 60,000 crore outlay for 2009-2010.
I argued in my previous column that the Supreme Court's prescription of distributing food free to the poor was impractical and represented an overstepping of the boundary between judiciary and legislature. I will go further and state that, should the Court's order be carried out efficiently, it could prove disastrous for India's food security in the medium term. Consider this scenario: the grain reserve is quickly swallowed up while the price crash caused by cheap wheat and rice flooding the market deters farmers from planting those crops. This causes future food shortages and price spikes, but the government now has reduced leverage because of its depleted reserve. Something analogous has been seen in sub-Saharan Africa, where local agriculture has been damaged by having to compete with cheap food aid.
The rational solution is for the administration to evolve a better way of selling food on the market, so that the reserve is maintained at an optimum level. Parallel to this, the wasteful public distribution apparatus ought to be replaced with a less inefficient system of cash transfers or food vouchers benefitting the poor.
A number of people suggest going beyond these measures to let the market have free reign over food production and distribution. The argument goes: government has proven itself incompetent, let us junk subsidies, fully commercialise agriculture, allow the easy purchase and sale of land, and free up international trade. The free market solution, however, would be considerably more damaging than even the Supreme Court's order. A free market in agriculture is, in fact, a recipe for famine in poor nations. The reason for this is simple: a market responds to demand, which is a function of purchasing power rather than of need. The work of Amartya Sen and Ajit Kumar Ghose has demonstrated that famines are not usually caused by an aggregate shortage of food, but rather by a collapse of purchasing power. In a free market economy, people with inadequate purchasing power are priced out of the market and have to depend on individual acts of charity. Private charity has never proved sufficient to stave off mass starvation.
The limitations of the market were exposed during a series of nineteenth century famines in British India which cumulatively cost tens of millions of lives. The free market theory of food supply went something like this: if there was a grain deficit in one region of the country, trade would ensure that supplies came in from other regions to make up the shortfall. When this failed to happen during famines in the early nineteenth century, it was explained away as the result of poor communication systems and infrastructure. By the last quarter of the nineteenth century, the railways had greatly speeded up freight, and it was believed that there was now no obstacle to an efficient market response to food shortages. What the theory didn't reckon with was that wages in communities affected by drought tended not to keep up with food price inflation. Instead of grain coming into regions where suffering was greatest, the opposite happened. Businessmen holding surplus stock preferred to ship it out to central depots in the hope of making a killing as prices continued to rise; or else to regions where a healthy economy ensured strong demand. During a famine in Berar in 1899-1900 which claimed 150,000 lives, 27 million kilograms of foodgrains were exported from the Central Indian province, whose population was about 2.5 million at the time.
The emblematic free market disaster was the Great Indian Famine of 1876-1878. It began with a drought in the Deccan and gradually spread across southern India before making its way north to the Doab. The Viceroy at the time, Lord Lytton, underlined his commitment to markets by commanding, "There is to be no interference of any kind on the part of government with the object of reducing the price of food." One of his juniors, Sir Richard Temple, had performed heroically during a food crisis in Eastern India two years earlier. As Lieutenant Governor of Bengal, he had responded to crop failure by organising the import of Burmese rice, setting up food distribution centres and initiating public works programmes, effectively preventing a catastrophe. As reward for his efforts, he was censured by the British establishment as a reckless spendthrift. Chastised, he performed very differently in 1876, sticking to a no-interference, laissez faire approach. The upshot was that between six and ten million Indians starved to death or were claimed by diseases related to hunger.
I find it incredible that, despite clear historical precedents showing how free trade exacerbates food shortages and creates famines, a number of Indians today are swayed by the free market philosophy. While nineteenth century Britons were merely wrong-headed, neo-liberals are hypocritical as well. Victorians like Lord Lytton believed in a philosophy that has come to be called Social Darwinism. A mix of Adam Smith, Malthus and ideas about evolution, Social Darwinism viewed human society as paralleling the way nature operated, with the survival of the fittest being the ruling creed. Social Darwinists never claimed to be working in the interests of the poor and downtrodden. If people starved, well, too bad, but that was nature's method of dealing with the unfit.
Unlike Social Darwinists, neo-liberals claim that their philosophy is beneficial for the poor. Institutions such as the World Bank and the IMF, for long bastions of free market thinking, have pushed their policy prescriptions in impoverished Africa in recent decades, with predictably tragic consequences. A study by Frederic Mousseau and Anuradha Mittal shows how the withdrawal of state intervention and the giving up of the idea of self-sufficiency has hurt the world's poorest country, Niger. Whereas in previous decades a food shortage would be dealt with by banning food exports and taking action against hoarders, the current non-interventionist stance resulted in what Mittal and Mousseau term a "free market famine" in 2005.
In Ethiopia and Malawi, international agencies encouraged the sale of grain reserves to pay off national debt. In the latter case, the stock was liquidated in advance of what was predicted to be a normal crop. The crop failed and a famine followed. The title of ActionAid's report on the issue says a lot: "The link between macro-economic and structural policies and the agricultural disaster in Malawi." Following the failure of neo-liberal prescriptions, Malawi's new government set up a programme of seed and fertiliser subsidies that was heavily criticised by agencies like the IMF, but resulted in a series of bumper crops in the impoverished nation.
India's current bout of food inflation is linked to a spike in international food prices that began in 2007. Jayati Ghosh has convincingly argued that the massive price rises of 2007-2008 were spurred by speculation in commodity futures. It was a food crisis that, "has been created and is currently being exacerbated by the workings of deregulated international finance". Proof of this is the fact that crops not traded on futures exchanges have not exhibited the same shifts in price as those that are. Futures markets were supposed to function as a hedge against volatility, but have becomes casinos in which producers and consumers are secondary. Financial institutions with no direct connection to food have taken over trade. When the US housing market began to tank back in 2006, these financial institutions, led by Goldman Sachs, looked for safe places to park money withdrawn from real estate. One of the commodities they focussed on was food. Since a number of them hit upon the same plan at the same time, it created a bull run that bore little relation to actual supply or demand. Countries exposed to fluctuations in international crop prices had to bear the brunt of skyrocketing inflation. India was relatively sheltered, but underdeveloped nations across the globe witnessed food riots as consumers found prices doubling almost overnight. The rise of this kind of speculation has created a new incentive for poor nations to retain policies of self-sufficiency and state intervention in food production.
I don't want to demonise the market. It has a crucial role to play in ensuring our well-being. The process of liberalisation has helped India achieve spectacular rates of growth which in turn have bolstered government revenues, creating for the first time in India's history a situation where it is realistically possible to end hunger in the country. It is however, delusional to believe that the market by itself will lead us to that goal.
Girish Shahane is a Mumbai-based freelance journalist. He writes the blog Shoot First, Mumble Later.