Why scarcities keep recurring, and how we can fix it
PremiumMarket intelligence units and import devices can help India overcome its habitual shortage denial
PremiumLet us go back to 1986 and tune in to Yes Prime Minister, the BBC show.
Humphrey Appleby: “Then we follow the four-stage strategy."
Woolley: “What’s that?"
Richard Wharton: “Standard Foreign Office response in a time of crisis. In stage one, we say nothing is going to happen."
Humphrey: “Stage two, we say something may be about to happen, but we should do nothing about it."
Richard: “In stage three, we say that maybe we should do something about it, but there’s nothing we can do."
Humphrey: “Stage four, we say maybe there was something we could have done, but it’s too late now."
If we go back gently into Indian history on any economic crisis driven by shortages, the four-stage strategy fits in. In 2006-07, we had a wheat crisis. We have an onion crisis almost every year; the irony today is that prices have crossed ₹50 per kg at a time that we are revelling in inflation being conquered, at 4.3%. This holds for tomatoes too, which have crossed ₹80 per kg in some states. And then there is India’s coal paucity.
The coal story is quite singular. India has one of the highest reserves of coal and we can theoretically mine as much as we want. In that, it is similar to crude oil. But when there is a shortage, it is not just about the price of coal going up with collateral damage to the wholesale price index. The problem can translate into a power-generation crisis as companies run out of feedstock and must ration their supplies, which in turn could result in outages elsewhere. This is new for us because the past decade has been full of achievement stories in the power sector, with every village and household said to have gained access to electricity. The embarrassment is that several people may still have to go without power.
A lot has been discussed on how this situation became so grim and what must be done. The important lesson is really for public policy, because what holds for crude oil, wheat, onions and coal also applies to others. The blame game in each situation is amusing. For crude oil, we blame West Asian suppliers. For wheat, futures trading was blamed and then banned. In the case of onions, wholesalers were blamed for hoarding. For coal, the game of passing on blame has multiple players, with the Centre, states, coal suppliers and power generators all pointing fingers at one another. Yes, power-generating companies must take the blame because when inventory levels dropped from 30 days to a low single digit, why were they napping?
Why is it that when we have a large canvas like our monetary system, there is never any major shock? The answer is that there is a lot of fine-tuning done by the Reserve Bank of India (RBI), and having a monetary policy every two months ensures constant monitoring. This has been done by statute. Similarly, when we are looking at the Budget and its implementation, there are departments that track revenue and expenditure to spot deviations and ensure there are no nasty shocks at the end of the year. While critics revel in being critical of expenditures being held back or the Centre not spending enough, the finance ministry is on top of things. The same idea needs to be mimicked in other areas too.
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For instance, in coal, it is now well known—though few paid attention, before the supply crisis escalated—that monsoon rains are not favourable for the industry and hence all constituencies in the arena have to be on the same page and keep one another in the information loop till October or so, by when a clearer picture is available.
The same holds for the horticulture department, which knows a late withdrawal of the monsoon is deleterious to the onion crop, which affects not just supplies but also prices that feed into the consumer price index (CPI). This in turn affects monetary-policy decisions. We have had this case of inflation going up and RBI having to accept this headline number (though the Monetary Policy Committee deliberations deviate to individual components and highlight core inflation). It would seem weird if RBI has to respond to CPI inflation pushed up just by onion prices. Therefore, the lesson is that all ministries should formally have an intelligence cell that monitors such developments on a regular basis and put plans in place for corrective action before a crisis gets entrenched.
The other issue is imports. Here we need to be ideologically aligned to increase imports whenever there are potential shortfalls. We must keep aside egoism or jingoism and the ideology of self-reliance to ensure supply adequacy. There should be economic thresholds in place for ministries to fast-track imports automatically based on availability rather than cost. It may be borne in mind that for onions, history shows that by the time tenders are floated and the supplies arrive at docks, the crisis is often over and there is no one to pick up the extra stocks, leading to wastage.
Market intelligence and import mechanisms can be combined by the government to make sure that no situation of scarcity goes out of control. Coal is a new twist in this tale and could also hold for other products. The auto sector has been buffeted by a global shortage of chips. Could this have been foreseen? Probably yes, because such shortages do not happen overnight but build up over time. There are lessons surely for all of us.
Madan Sabnavis is an independent economist and author of ‘Hits & Misses: The Indian Banking Story’. These are the author’s personal views.
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