People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 03

January 21, 2007



Some Issues Concerning Price Rise


Brinda Karat


THE prime minister’s statement that the government will take measures to control inflation was followed by an assertion that prices of essential commodities particularly wheat would come down as more stocks are expected in the market due to imports of wheat. A similar argument had been advanced by the finance minister in June last year when in the course of a discussion in parliament he had spelt out the measures the government has taken to bring down prices. His argument was that once the supply side is addressed the problem would be solved. The steps he mentioned were: Government policy to import wheat, to put wheat imports on the Open General List and to reduce import duty to zero; the release of 42 lakh tonnes of free sale sugar to bring down prices of sugar; similarly zero duty on import of pulses and ban on their export. He also claimed that the Forward Markets Commission had taken steps to regulate the futures markets. It is clear that none of these measures have succeeded in bringing down the prices of essential commodities. From June 2004 when the UPA government assumed power to November 2006 the graph of rising prices of some essential commodities reveals the continuing mismanagement on this front and the utter failure of the government to bring down prices. (see table)


Kendriya Bhandar Rates



Atta Shakti Bhog


Chana Dal

Kabli Chana

Washed Moong Dal

Washed Urad Dal

Price in June 2004 (Rs/kg)







Price in November 2006










The October monthly economic report of the finance ministry notes that increase in the inflation rate (Wholesale Price Index) was mainly caused by an increase in the price index of primary articles by 6.65 per cent and fuel by 5.47 per cent over last year. The Consumer Price Index for industrial workers (which has been criticised for underestimating the inflation rate) was higher by 6.8 per cent over last year. The CPI for agricultural workers registered a similar increase. The large majority of people in our country are in the unorganised sector with fluctuating incomes and no protection against rising prices. While prices have risen, incomes have not registered a similar rise. We know about the acute agrarian distress in many parts of the country, only recently international agencies have pointed to a most disturbing trend of increasing malnutrition in India particularly among children and women. Price rise will further this trend.


Another aspect of increasing prices is that people are having to pay more for basic services such as health, education, transport and so on. One of the reasons for rising indebtedness of families is the increasing cost of health care linked to the increasing costs of drugs. Inflation combined with policies of privatisation has forced a deterioration in the lives of the mass of our people.




Price rise of essential commodities is not a seasonal phenomenon as is often claimed but has become structural. There are several factors responsible for rising prices, one of them certainly is the seven times hike in fuel prices under the UPA regime. The administrative price increases on petrol and diesel has had a cascading impact on all prices. It was claimed that the price increases were necessitated by the increase in international prices of crude oil to around 72 dollars a barrel. In this backdrop the price of petrol was raised by 4 rupees and that of diesel by 2 rupees in June 2006. When international prices started declining the CPI(M) and Left parties demanded a reduction in domestic prices and under pressure, the government was forced to reduce the price but did so only to the extent of 50 per cent of the June 2006 hike. Since then, the international prices have further fallen to around 50 dollars a barrel. Clearly it is essential for the government to immediately pass on this benefit to the consumer by reducing the prices at least to the pre-June 2006 level, that is to cut the prices by two rupees on petrol and one rupee on diesel and subsequent reductions proportionate to the decrease in international prices. Prices of petroleum products in India are far higher than those in Pakistan, Bangladesh, Nepal and Sri Lanka. The government of India continues the ad valorem duty structure, which means that tax revenues automatically rise with every price hike. Thus the government actually benefits from international crude oil price rises. The CPI(M) has demanded since long that this ad valorem duty structure on petroleum should be done away with. The government has to restructure the customs duties and excise duties structure so as to ensure that the consumer is protected from the onslaught of unstable international prices.




The basic issue is what is the government’s approach towards management of the economy? The finance minister stated during the last parliament debate on price rise “that nobody in the world wants to go back to a dirigiste economy” and “India will certainly not go back to a dirigiste economy”. This means in other words that the processes of planning and government intervention will continue to be minimised and the market will have a greater role in determining prices of commodities. It was claimed by the finance minister that in the last fifteen years India has benefited from liberalisation and is currently experiencing 8 per cent GDP growth. He argued that the natural corollary of such a high rate of growth is some inflation and the country should learn to live with it. The fallacy of this argument is evident when we see other economies that are growing but where inflation is under control. For example China, which has a higher GDP growth rate than India has been successful in keeping the inflation rate below two per cent.


But when we take the Indian situation, while the national growth rate is eight per cent – with a target of ten per cent – this pattern of growth is basically inegalitarian. Two thirds of India living in the rural areas is dependent on agriculture. The growth rate for agriculture is less than two per cent. Thus we have two per cent growth for two thirds of the people. Is the government going to tell them that “the economy is growing and therefore you have to live with price rise?” The fact is that even while the list of Indian billionaires crosses 300, the purchasing power of the mass of people is going down and regular employment with a cushion of dearness allowance does not exist for the mass of people. The latest NSS 61st round shows a significant increase in self-employment as opposed to paid jobs. Therefore telling people who are suffering as a result of the pattern of growth that “price rise is inevitable” is adding insult to injury. The fact is that price rise is a consequence of the neo-liberal policy framework of the government, which has forced a retreat from its fundamental duties to provide the basic minimum goods and services to the people at affordable prices. Rather than showering contempt towards a planned economy and getting obsessed with the neo-liberal free market utopia, the UPA government should revise its strategy in order to stabilise prices of essential commodities. 




To understand how a neo-liberal, market-driven model has led to rising prices, let us consider the example of wheat. Wheat prices have reached unprecedented high levels, in some places between 14 and 15 rupees a kilo. The huge mismatch between demand and supply has been caused precisely because of the free play of the market. In 2001-2002 with a production of 696.8 lakh tonnes, there was procurement of 206.30 lakh tonnes. In 2005-06 at around the same level of production, the procurement by government has been slashed to just 91 lakh tonnes. In 2002 because of the refusal to universalise the PDS and distribute the grain to the poor at reasonable prices, it resulted in huge problem of overstocking. In 2005 the virtual retreat of the government from procurement and handing over the procurement to big trading companies has led to a situation where ration card holders have been deprived of wheat. Wheat allocations for the PDS have been slashed from around 24 lakh tonnes in November 2005 to just 8.4 lakh tonnes in November 2006. Consumers are having to pay high prices for wheat in the market and India will have the dubious honour of being the biggest importer of wheat in the world with estimates that the present import of around 5 to 6 million tonnes of wheat will go up to 8.5 million tonnes.


Neo-liberals say, what is the harm in importing wheat in a globalised world? Give up self-reliance, it is no longer necessary and belongs to a bygone era, we are told. Even if one were to accept this absolutely atrocious argument that adversely affects national sovereignty, just in terms of resources what has it meant for India to import wheat? The government has floated five tenders for wheat. The spacing out of tenders reflecting a poor management and lack of understanding of India’s need at best and collusion with big foreign traders at worst also pushed up wheat prices from 178 dollars per quintal in the first tender to over 238 dollars in the fifth tender eight months later. Thus a policy which started with the encouragement to big private companies to corner the wheat stocks in the name of helping farmers get a good price, ended up in paying foreign traders 400 rupees more per quintal than what it paid to Indian farmers. Reportedly it has cost Rs 5300 crores in foreign exchange. Is it a coincidence that some of the biggest beneficiaries are MNCs like Cargill and Australian Wheat Board who had cornered the Indian stocks and then successfully bid for providing the imports? Phytosanitary Standards have also been lowered in the specified quality of the imported wheat which has enhanced the danger of contaminates and alien fungi spreading in domestic wheat. It has been alleged from various quarters that the Americans have been lobbying hard for lowering of the standards. Private trade has also been allowed to import at zero duty with a loss to the exchequer of around 90 crores rupees. So clearly the wheat story is a glaring example of what happens when the market is given free play. 




Another example of the havoc wrought by the free market is sugar. The prices of sugar have also increased following the lifting of regulations and controls on the industry while sugarcane growing farmers face a severe crisis with huge pending arrears. From 2002, futures trading in sugar was permitted by amending the Forward Contracts Regulations Act. The steps included decontrolling of sugar, levy obligations brought down in 2002 from 40 per cent to 10 per cent and the subsequent disappearance of sugar from the ration shops. Today prices of sugar have shot up to 20 rupees and above a kg. Now, bowing to the pressure of big traders, the government has lifted the ban on sugar exports saying that there is a bumper crop. No doubt in the near future there will be manipulated shortages just as there was in wheat and the consumer will have to pay the price. We must demand that there should be no exports of sugar and that sugar be once again made available in adequate quantities in the public distribution system. It has also been reported that the commerce ministry is considering the lifting of curbs on exports of two items, kabuli chana and masur dal, as a “special case” since their prices have not witnessed steep rises as compared to the other pulses. Is the ministry unhappy that the prices of these commodities have not risen so far? Here is a clear case where the government seems intent on increasing the prices of certain commodities, which are consumed by a large section of the population. 




Another major reason for the present price rise in some agricultural commodities is that the UPA government has not rescinded the disastrous measure taken by the BJP-led NDA government in April 2003 to permit futures trade in agricultural commodities, including essential commodities. This has led to the unrestricted entry of speculative capital in the futures trade in agricultural commodities. The manipulation of prices in the exchange also has a direct impact on spot prices in the market and also encourage hoarding in the hope of even higher prices. The total value of commodities futures traded in 2003-2004 was 1.29 lakh crore rupees, which increased to 5.71 lakh crores in 2004-2005 and to 21.43 lakh crore rupees in 2005-2006. This is a whopping increase of over 600 per cent in just three years. Although the restrictions were removed in the name of helping the farming community to get a good price for their produce, in reality, futures trading has only helped speculators and big traders to make huge profits. 


For example only recently the Intelligence Bureau had to inquire into the sudden spurt in the prices of maize in the commodities market by over 25 per cent. The IB attributed the price rise to systematic manipulation by big traders and four of them were suspended. Exchange officials have also expressed concern over similar price manipulations in the commodities exchange of other products such as chana, urad, tur, chilli, wheat and sugar. In a recent interview the chairman of the Forward Market Commission (S Sundareshan, Economic Times, December 6) said “ If commodities were to be viewed entirely as an asset class then there would be an expectation of returns from investment in commodities. This would necessitate upward movement of prices of commodities as is the case in equity and real estate. It is debatable whether such a movement of prices would be acceptable to society or the economy as a whole as this would affect the consumer”. Finance minister in the debate on the issue in May 2006 said in parliament “Now frankly I am not entirely convinced that this theoretical justification (that farmers will benfit) is right in India. There is a debate within the government. We are waiting for the Standing Committee to give its report before parliament. As I said personally speaking I am not entirely convinced.. I think we must have a closer look at it.. Should we have future trading in commodities at all? If we should have under what regulation should we have? Should some commodities be kept out? ”


Since then the Parliamentary Standing Committee on Consumer Affairs looking into the proposed legislation for regulation of the futures trading has given its report. It has made a categorical recommendation that essential commodities should be kept out of the commodities exchange. “The Committee strongly feels that to permit derivatives and options in the name of farmers and small traders is nothing but a ploy for protecting the speculative financial interests..” It has recommended that there should be a ban on futures trade in essential commodities so as to protect the interests of both the producer and the consumer. Shockingly, rather than accepting this crucial recommendation the government is moving in a completely opposite direction by permitting futures trade even in potatoes and onions, which were hitherto outside the purview of futures trade. The CPI(M) has demanded that there should be a ban on futures trade in essential commodities and that the Standing Committee recommendations on this issue should be immediately accepted and implemented by the government.




The view of the food and consumer affairs minister seems to be quite contrary to the views expressed by the Standing Committee. It is shocking that the FCI has signed an MoU with the Warehousing arm of the National Commodities and Derivatives Exchange. This company, called the National Collateral Management Services promotes itself as setting new standards for “risk management in commodities”. It has been given the responsibility in the name of “decentralisation of procurement” to supplement FCI efforts for procurement of foodgrains. FCI is expected to help this private company by providing warehouses to it as well as funds. It defies logic. FCI is more than capable of procurement, which it has been doing for decades. Now procurement is being handed over to a private company that has to be provided funds and warehouses by the FCI itself! Secondly at what prices is it procuring and at what price is it giving it to FCI? What is its commission percentage? We strongly oppose this scheme.




The recently published 2005-2006 annual plan of the Planning Commission says “PDS is the most significant instrument in government policy to moderate open market prices and to ensure food security at assured prices”. Unfortunately this most significant instrument is being turned into the most insignificant with a deliberate policy of weakening and eroding its different parts. We have discussed the procurement aspect earlier. The storage and transportation aspect is equally important. At present it is mainly through the FCI. This is a most maligned institution. True there may be many failings in the functioning of the FCI. There have been several serious cases of corruption and diversion of foodgrains to the blackmarket. These issues must be urgently addressed and problems rooted out rather than throwing the baby out with the bathwater. It is no coincidence that the government wants to bring the Warehousing legislation to promote private warehouses while at the same time 273 FCI godowns have been given up. Employees are being asked to take VRS and since 2004 around 10,000 employees have taken VRS. There is an acute shortage of quality control staff. When the main procurement distribution and storage organisation is being weakened there will be a most negative impact on the PDS. Today when market prices are ruling so high, there is an urgent need to expand the network of distribution through FCI and fair price shops but both are being weakened.


The CPI(M) has repeatedly argued that the universal system of PDS recommended by the Abhijt Sen Committee is essential to provide food security to our people. We need once more to push this demand and also the demand to include a greater number of items including dal, edible oil and sugar in the PDS at controlled prices.




The answer to price rise lies in government’s intervention in the economy to ensure supply of essential commodities at affordable prices. Imports may be a stopgap arrangement to meet a particular shortage but they cannot and must not become a substitute for a self-reliant economy. 


It is essential for an urgent course correction away from the policies of free market and liberalisation. In 1998 when roles were reversed and today’s ruling party was in the opposition, the then MP from Sivaganga who is now the country’s finance minister, had said in a discussion in parliament on price rise that “taming of inflation must be the highest item on any government’s agenda, any government which has some heart must place inflation control as number one on the agenda. People eventually vote with their stomachs..” The finance minister would do well to remember his own words. It would be self-destructive not to because the people indeed will vote with their stomachs.