Pro-market, pro-poor

Let8217;s sympathise with the UPA first about its inflation-related panic. Everyone8217;s panicking. In China, those supposed cool-headed market-friendly communists who don8217;t have to worry about elections have been imposing price controls with the same zeal they build airports or punish Tibetans. Latin American countries like Argentina banned exports of some farm products even before 20088217;s global food price rise. Russia experimented with a 60-day ban on wheat exports. Countries as different as Vietnam and Egypt have put restrictions on trade. Gloria Arroyo, the Filipino leader, has even asked KFC and McDonalds to serve less rice with their meal combos. Soldiers are guarding grain silos in Pakistan. So yes, the UPA is part of the globalised response to inflation. And it has a special urgency with Karnataka elections looming, a raft of state elections coming up and the Big Question 8212; when to hold national elections 8212; getting trickier. But panic is producing bad policies everywhere including in India.

What is bad about panicky anti-inflation policy is the assumption that price and commercial behaviour can and should be controlled. Price controls, inspectors raiding private storage facilities, export bans and general trade restrictions disrupt cost-profit calculations of businesses and/or signal that government expects prices to rise more. This drives legitimate trade underground and/or makes holding on to stock more profitable for traders. The political class won8217;t admit this but the Essential Commodities Act has been given more and more teeth over the years and its bite has been as ineffective as ever. Proscriptive measures also frequently neglect facts. Banning cement exports sounds good in rhetoric. But only 3 per cent of India8217;s cement production is exported. Smallish companies located in Gujarat do that and their clients are Sri Lanka and South Africa. Would depriving Sri Lankan and South African consumers of this amount of cement increase supplies and bring down prices in India? Steel export ban, for which Ram Vilas Paswan is working so hard, would prevent 6 per cent to 8 per cent of total domestic production from being sold abroad. Will this bring down prices substantially?

And any export ban, for steel, cement or rice, immediately encourages price rise expectations. This works both internally and internationally. If exporting countries block global supply, global prices get a push. Price rise reflects scarcity and at no time is free trade more effective as a welfare-enhancer than when it combats scarcity by quickly getting supplies where the demand is. But control and ban regimes in India and other countries are denying free trade this role. Internally, the government should have let market forces be, therefore not tried to bring down prices for everyone and targeted the poor, whose incomes are not inflation-indexed. This is the time to seriously implement ideas like food coupons. But no one seems to believe it is possible to be pro-market and pro-poor.