Ideas, knowledge, art and travel are things which should be international, but let goods be homespun whenever possible, said John Keynes in 1933. Are we realising the wisdom of Keynes’ statement now, with India facing rising inflation with economic slowdown? Is this the result of the blanket opening up of the Indian economy? Are there lessons to be learnt about the benefits of a more selective opening up, asks economist Aseem Shrivastava

A spectre haunts India, the spectre of stagflation. But if, as appears increasingly true, globalisation has triggered the problem, it also offers a possible consolation: much of the world is perhaps faced with the same fate in the foreseeable future. Certainly, the rest of South Asia is in the same soup, since food and energy prices worldwide show no signs of falling. Given how much pride we take in India in repeating the mistakes of the West and suffering from the same problems, it will perhaps pacify some people to know that “the world” shares our fate.

Stagflation is the name economists give to an economy that is slowing down at a time of rising prices (stagnation plus inflation = stagflation). For the very first time, certainly since 1991, economic growth in India is decelerating just when record inflation is ripping through the budgets of the poor and the salaried classes, giving painful headaches to the ruling coalition in this election year. This is not what economists are typically trained to expect: normally, prices rise with growth and falling unemployment, and fall with a recession and rising unemployment. To get both rising inflation and growing unemployment simultaneously was an anomaly even in the West till the oil price shocks of the 1970s.

Galloping inflation in the price of food and energy is a global phenomenon today. Thanks to the opening up of the economy after 1991, India reflects the trend. According to the latest data released by the Government of India, inflation according to the wholesale price index is almost 8% p a, the highest in four years. (Unlike in other countries the government in India does not ordinarily report the consumer price index.) Retail prices have risen much more. (It is important to remember that services – including health and transport – are not included in calculations of the inflation rate in India.) More to the point, the rise in price of food is even more serious. The retail price for rice, for instance, has gone up by 20% during the past one year. Certain varieties of pulses have risen by the same proportion. Most disturbingly, edible oils (in which India was self-sufficient a decade ago, but now imports a very large fraction of its needs) have gone up by 40% during the past year. (If the price of petroleum products has remained somewhat indifferent to international trends, it is because of the strange system that Indian governments have to keep the domestic consumer protected from them: on this, more later in this article). The ruling coalition has good reason to be anxious, especially in this election year.

Whither growth?

Normally, economists confronted with this data on rising prices would expect that the economy was growing rapidly. But of late, the Indian growth engine seems to have slowed down quite dramatically as well, raising fears of stagflation. Recently released data indicates that industrial production increased by just 3% between March 2007 and March 2008. (In the corresponding period before March 2007, the rate of industrial growth was as high as 14.8%). The slowdown in the capital goods sector – always an early warning signal since it indicates business expectations most accurately – has been quite dramatic: from 16.3% during 2006-07 to 2.1% in 2007-08. Almost equally portentously, the consumer durables sector, growing at 5.3% in 2006-07 has decelerated to -3.1% in 2007-08. Finally, there is a perceptible fall in the rate of growth of all the key infrastructure industries, including coal, electricity and petroleum refinery products. Little wonder that The Economic Times carried the headline recently: “Industrial engine misfires on manufacturing defect”. The finance minister’s repeated reassurances that “the India growth story is here to stay” have an increasingly hollow ring about them.

The slowing down of the Indian economy has resulted at least in part from the volatility in global financial markets (which has had a dramatic downward effect on Mumbai’s stock market index, the Sensex, for instance) and the onset of recession in the US economy, resulting in falling demand for Indian goods and services. So far the Indian growth story – with the export-oriented IT-BPO sector leading the way – was untested by an American recession.

But now, times are changing alarmingly fast. Ever since the bursting of the housing bubble in the sub-prime crisis in the US in August 2007, questions have been raised about its impact on the growth of the Indian economy. Such fears were exacerbated by the financial crisis and the resulting credit squeeze when one of the largest investment banks in the world, Bear Stearns, all but went bankrupt and had to be bailed out by the Federal Reserve in March earlier this year. The scenario has become discernibly bleaker since the sudden acceleration of inflation during the past few months, thanks mainly to a growing commodities bubble and a steadily rising price of oil. All these are forces that would have impacted a more “selectively” globalised economy a lot less. But such is not the case of India today. Given how much blanket “opening up” has happened in almost every area of economic contact with the global economy, it is no surprise that as Wall Street catches a cold India too must sneeze.

India’s integration into the global economy has come at the high price of an enormous growth in the dependence of the Indian economy on the fortunes of American and other rich economies. (This is not because India without access to the markets of other countries is condemned to be a small economy. It is because the development of a home market for products with a mass consumption base has simply not been a priority with the governments of liberalising India.) The US recession is causing significant falls in the demand for Indian exports (affecting Indian growth and employment adversely). Even areas like summer tourism are feeling the pinch. Thanks to the rise of the rupee against the dollar till very recently (making Indian goods more expensive for Americans to purchase), up to 2 million workers lost their jobs within a few months in areas like textiles, leather and handicrafts, by the Union Commerce Ministry’s own admission. The heat is being felt in far-flung places like Moradabad and Surat.

This is being exacerbated by the credit squeeze resulting from decisions taken by the Federal Reserve (the central bank) in the US, which is making it more difficult for Indian companies to raise capital abroad, impacting capital inflows into India adversely. This has had adverse consequences for Mumbai’s stock-market index.

Growth is also being pulled down by rising input costs in all industries, thanks to the rise in price of key products like steel, cement and oil. Companies have expressed their annoyance at the government’s recent decisions to impose price controls in these key industrial sectors. Companies have also been complaining of rising interest costs on the debts they have incurred during their expansion period over the past several years, the RBI having raised interest rates during the intervening period to rein in inflation. Finally, industrial investment is being slowed down by unprecedented uncertainties in the global economic climate.

In short, the Indian economy has been drawn willy-nilly into the gathering maelstrom of crises that are sweeping the global economy in what must be the most uncertain of times in the annals of capitalism.

Implications of the falling dollar: A digression

Indian governments shield domestic consumers (and, politically speaking, themselves) from the impact of rising world oil prices by issuing oil bonds to the three major public sector oil companies which then keep the market price of oil in check in the expectation that they will get the outstanding debt back with interest in the future. It is a clever way to make the public pay for the oil price increases by postponing the day of reckoning, almost indefinitely at times.

Oil prices crossed the $100 a barrel mark earlier this year, doubling from $50 just over two years ago. It is now trading at $120-125 a barrel in the spot market. Some analysts foresee the $200 mark being cleared before the end of the year, if present trends continue. Why are oil prices rising? Of course it is true that the steady rise in the price of oil over the past few years has a lot to do with the arrival of the era of “peak oil”, when demand is outstripping supply of oil at an alarming rate. This of course is greatly aggravated by the energy demand from China and India, both of which have been growing very fast in recent years.

Another important reason for the recent spurt in the price of oil has been the greater attention that oil futures have received of late from powerful speculator firms with plenty of cash to play with. This has been one of the fallouts of the bursting of the housing and credit bubbles in the US since the middle of 2007. In an era of excess liquidity made possible by financial deregulation, money needs to be invested somewhere or the other. And if financial assets no longer seem safe, commodities like oil offer one route of escape.

However, it is also inevitable that if the dollar falls (as it has been since the day the Euro was launched six years ago), oil prices must rise. The reason is that the oil market (no points for guessing why) has been a dollar-denominated market from even before 1971, when the dollar became the de facto reserve currency of the world (after the breakdown of the Bretton-Woods system which made it impossible to convert dollars into gold any longer). So a falling dollar implies that oil must rise in price.

Why has the dollar been falling steadily? Quite simply, because US-based firms have less and less to sell to the world, though the world has a lot to sell to American consumers. America has lost competitiveness in recent decades, largely to China and East Asia. This growing imbalance in world trade (present for over two decades now) has meant a ballooning trade deficit (excess of imports over exports) for the US. It has paid for this by selling US Treasury Bonds (perhaps the most sovereign, reliable financial asset hitherto) to foreigners. Increasingly, however, the realisation has grown that the US is not in a position to redeem its $10 trillion external debt. This is almost tantamount to saying that in order to pay for goods produced by China the US has merely been printing the required quantity of dollars. Clearly, this is not a sustainable state of affairs.

It goes without saying that no economic power holding dollar debts – least of all China with its $1.5 trillion foreign reserves – wants the American currency to collapse all at once. At the same time, every significant player is keen to heed the reality of falling US competitiveness and the underlying long-term weaknesses of the American economy. Amidst American calls to revalue their currency (in order to boost Chinese imports from and lower their exports to the US), the Chinese themselves, for instance, announced publicly to the US sometime back that they will be reducing their purchase of US Treasuries, that they are slowly moving their massive foreign currency reserves away from dollar-denominated assets into those reckoned in other currencies like the Euro and the Yen. As major players like China have been reducing their holdings of dollar-denominated assets, the American currency has lost value even further. As has been noted by many a commentator “what can’t go on forever will not go on forever.”

What are the implications of all this for India? We have already seen how the rise of the rupee vis-à-vis the dollar has meant loss of exports, employment and growth to India, given its enlarged dependence on the US market. As the dollar continues to slide, we can expect more of the same. Jobs will be lost not just in textiles and leather goods but also in IT and BPOs. (Very recent data indicates that the rupee is falling against the dollar again: however, this is unlikely to be a long-term trend.) The falling dollar will also facilitate US exports to India, as Indians find it cheaper to buy US goods and services. This can have significant consequences in the area of food purchases in the future, with negative implications for those among our farmers who are competing with imports in the open-economy agriculture that has been forced upon India and other developing nations by the WTO, the IMF and the World Bank.

Factors underlying the global food price rise

Almost the entire world is today in the grip of a historically high inflation spiral. Such an episode of world-wide inflation has not been witnessed since the 1970s. World grain reserves (enough only to feed the world for 26 days, according to the UN’s World Food Programme) are at their lowest in a generation.

How high has inflation in food prices been? According to the UN’s Food and Agriculture Organisation, between March 2007 and March 2008, world prices of cereals grew 88%, oils and fats 106% and dairy 48%. The FAO food price index as a whole rose 57% in one year. Most of the increase has come in the past few months.

According to the World Bank, in the 36 months ending February 2008, world wheat prices rose 181% and overall world food prices increased by 83%. The bank expects most food prices to remain well above 2004 levels until at least 2015.

The most popular grade of Thai rice sold for $198 a tonne five years ago and $323 a tonne a year ago. On April 24, 2008 the price reached $1000! Price increases are far greater in local markets — in Haiti, the market price of a 50 kg bag of rice doubled in one week at the end of March.

Shortages are evident even in rich countries. Rationing has appeared in Western countries for the first time since World War II. In the US consumers were shocked to find that they were only allowed to buy one bag of rice at a time at WalMart stores in the MidWest. Purchases of flour, rice and cooking oil have been limited at stores throughout New York, New England and the West Coast, even affecting the “breadbasket” states.

As the figures indicate, the inflation in food prices around the world has been unprecedented in at least a generation. The prices of wheat, rice, corn and other major food items have doubled or even tripled over the past few years. What lies behind the food crisis?

Firstly, there is a significant change in the demand side of the world market. The middle class has grown in emerging economies, especially China and India, adding to the number of people in a position to demand meat. It takes about 700 calories of grain-feed to generate 100 calories of beef. So the rise in the demand for meat has put pressure on grain supplies. American-style diets are taking their toll. But the global middle class has been growing for at least a decade, whereas most of the rise in prices has transpired only during the past few years.

The rapid increases in the price of oil have to be considered in any explanation for the inflation in food prices. We have already gone into factors behind the rise in oil prices. How do oil prices affect food prices? Modern industrial agriculture is highly intensive in the use of fossil fuels. It takes 10 calories of fossil fuel energy to produce 1 calorie of food energy. Fossil fuels are used in the diesel pump-sets used to bring irrigation water to farmlands. Without petroleum products it’s not possible to produce the fertilisers and pesticides which are widely used to enhance agricultural productivity. (Use of fertilisers in Third World agriculture has increased over 50% during the last decade.) Finally, perhaps most importantly, a rapidly growing fraction of the world’s food is traded internationally. This means that the freight costs of food rise with any increase in the price of fuel.

The third significant factor that has to be noted in an explanation of the food price rise is the run of bad weather that has come to many parts of the world in a time of rapid climate change. Australia, one of the largest wheat exporters in the world, has had a succession of bad harvests. So has Ukraine. The effects on the world price of wheat have not gone unnoticed. Floods last year in places like Bangladesh and North Korea had disastrous effects, as have years of low rainfall in the Western states of the American union.

Fourthly, the Bush administration’s decision to aggressively push biofuels since 2006 is seen by many to be perhaps the main trigger for the recent rise in food prices. The US government started giving subsidies to farms for growing corn for the purposes of making ethanol for use in automobiles. The aim was to reduce dependence on West Asian oil as much as to reduce carbon emissions. The side-effect was to raise corn prices, making farmers plant more corn and, as a consequence, less soya and wheat. The final effect was a surge in the price of all grains worldwide, since more than 20% of American corn fields were reallocated for the purpose. Apart from the fact that fuel for the SUVs of the rich trumped basic food for the poor, it turns out that producing a gallon of ethanol from corn uses most of the energy that the gallon contains.

Inflation: Entirely imported?

Anything that happens in the economic universe obviously benefits someone or another. Otherwise it wouldn’t happen. It’s a commonplace that inflation is a means of redistribution of income. It worsens economic inequalities by shifting resources away from those with fixed income to those with a variable, capital income. In effect it becomes an inescapable tax on the poor and salaried classes, whose wages are not indexed to inflation. It’s also obvious that the poorest pay most heavily for food price inflation since they spend half or more of their monthly budgets on food.

In the 1970s too grain and energy shortages had combined to generate inflation. However, the difference is that now (much more than ever before), the bulk of the poor in the Third World are far more dependent on the global economy (either on the income side if they are selling, in response to price signals sent by the world market, or on the expenditure side if they are buying). For that matter, a far greater proportion of the world’s poor are cash-dependent, common property resources (which have traditionally enabled them to meet much of their needs in kind) having been wrested from their control over the decades.

Moreover, world food prices are being controlled and manipulated more and more by a handful of powerful grain traders operating through centralised institutions like the Chicago Board of Trade. A recent UN report has highlighted that thanks to the lobbying efforts of transnational agribusinesses and the aggressive conditionalities applied by Washington’s IMF and the World Bank on poor countries (including India), “in the last two or three decades, there had been a significant increase in the concentration of power of transnational agro-businesses that had come to dominate not only marketing and consumption, but also the production and supply of food inputs. That problem was being exacerbated because of the strengthening of the intellectual property rights and the extension of those rights to cover agricultural inputs. The consequences had largely been at the expense of small farmers and consumers, especially the poor.”

According to the same report as many as 3 billion people (almost half the world’s population) are “food-insecure” now. As many as 18,000 children are dying daily because of inadequate nutrition. The World Bank estimates that as a result of the price increases of the past three years about 100 million more people may have re-entered poverty already. The number may grow in the months to come, as food prices continue their upward climb.

One must notice the method in the madness: it is no coincidence that food is being taken away from the plates of the world’s poor. It is the natural side-effect of the policy-package imposed on the poor nations by the triumvirate of the IMF, the World Bank and the WTO who have been spearheading corporate globalisation over the past two decades since the end of the Cold War. In order to secure the business and financial interests of Western corporations they have aggressively pushed a set of policies on poor countries which are inimical to the interests of the latter.

For what happens when you prise open a poor country’s food market by coercing it to remove import tariffs and force its domestic grain to compete with the heavily subsidised grain being produced in the US and the EU? You permanently cripple the hitherto modestly self-sufficient subsistence agriculture of the developing nation. You make the small farmer’s life impossible. You make him cash-dependent and you effectively force his country to buy grain from gigantic transnational grain traders who rule the roost in the world market.

The OECD nations continue to subsidise their agriculture to the tune of nearly a billion dollars a day, right before the world’s nose. The food crisis and the prospect of famine in certain areas of the world that lies ahead is the direct consequence of policies carried out with such routine criminal hypocrisy. And within the rich nations, who gets the subsidy? Not the farming communities, who are rapidly being ushered out of the agricultural profession! Newsweek reported recently that in the US, for instance, two-thirds of the farmers have not seen a penny of the subsidies that have been granted by the government, as much as 68% having gone to 10% of recipients, whose list includes corporate giants like Archer Daniels Midland, International Paper and Chevron. The story in the EU, where over 30% of farm revenues come from subsidies, is not too dissimilar. In Britain the list of beneficiaries from farm subsidies include the Queen who received over $800,000 last year. The West is not even consistent to its putative adherence to principles of comparative advantage and free trade. (Otherwise, why the prominent role for the arm-twisting “multi-lateral” institutions?)

Just how devastating the imposition of IMF-World Bank-WTO economics can be to a vulnerable nation’s ability to feed its population can be learnt by following the story of rice-farming in Haiti during the past few decades.

Rice has been a staple in Haiti for ages. Till the late-1980s, Haitian farmers produced about 170,000 tonnes of rice a year, meeting 95% of their domestic consumption requirements on their own. Rice farmers received no government subsidies. However, in common with other rice-producing nations, their access to local markets was guarded by import tariffs.

Things changed in the 1990s. In 1995, in order to meet the exigencies of a foreign payments crisis, Haiti had to contract a loan from Washington’s IMF. One of the conditionalities the IMF imposed on the desperate nation was to cut its tariff on imported rice from 35% to 3%, the lowest in the Caribbean. The result was a massive import of US rice at half the price of domestically grown rice. Thousands of rice farmers lost their lands and livelihoods. Today, three-quarters of the rice eaten in Haiti comes from the US.

US rice-growers were not more efficient. But rice exports were heavily subsidised by the US government. In 2003, US rice-growers received $1.7 billion in government subsidies, an average of $232 per hectare of rice grown. That sum of money, the bulk of which went to a chosen few very large landowners and agribusiness corporations, allowed US exporters to sell rice at 30-50% below their actual production costs.

In sum, Haiti was coerced into abandoning state protection of domestic agriculture. The US then used its own devious government protection schemes to take over the Haitian rice market.

There are many cases (far too many to elaborate on here) along the same lines that one could discuss, with rich countries imposing “liberalisation” policies on poor, debt-ridden countries and then taking advantage of that forced “liberalisation” to corner their markets, while securely protecting their own. Examples – from the devastation of Mexican corn farmers after NAFTA to rice-farmers in the Philippines after it joined the WTO in the 1990s  – abound. India has been turned from the hard-earned status of a food self-sufficient nation into a net importer of cereals under the “open-economy” regime favoured by establishment economists and the Bretton-Woods institutions.

IMF-World Bank-WTO economics is designed to make otherwise largely food self-sufficient poor countries ultimately dependent on imports and credit from the rich nations. In fact, it was an explicit goal of the Agreement on Agriculture under WTO in the 1990s to create markets in the developing world for the surplus grain being produced in the OECD nations. It was argued, with more than a hint of paternalistic patronage, that such food would be cheaper for consumers in poor countries to afford. The fact that it was highly subsidised by rich country governments (at the expense of the taxpayer) did not seem to matter. It seemed a small price to pay to allow transnational agribusiness to take control of the world’s agriculture and keep the poor nations trapped in a net of dependency on the West. In consequence, the day is perhaps not far when all of the world’s agriculture will have become industrialised along lines desired by a handful of powerful corporations.

The world grain trade game is a rigged one. It helps to be rich and militarised enough to write the rules for the poor.

Nor do such trade hypocrisies exhaust the list of measures which the WTO, the IMF and the World Bank impose upon the poor countries through the enabling offices of their governments. Recent UN reports have also stressed how the food crisis is also a manifestation of the shift of crop acreage encouraged by the Bretton-Woods institutions over the past several decades, away from staples to cash crops (including flowers etc) produced for exports to the affluent countries.

One has to bear in mind that so-called multilateral institutions like the World Bank are banks at the end of the day, with a keen eye for the bottom line and their bond and credit ratings. Thus, they ensure that loans underwritten by them come back with handsome rewards. Up to a quarter of the Indian budgetary expenditure every year is earmarked for interest payments to foreign creditors. (This year the sum was close to Rs 200,000 crores: $50 billion: no one talked about it in the post-budget discussions.) This, coupled with such restrictive legislation as the Fiscal Responsibility and Budgetary Management (FRBM) Act, 2003, which binds the central government to a balanced budget, leaves fewer options with the government for the funding of long-standing needs of public investment in agriculture. Irrigation, power supply, technical extension services for agriculture have all languished in the era of so-called “liberalisation”. Over 60% of India’s population derives its livelihood from agriculture, but it has attracted only 5% of plan funds from the central government during the post-reforms era. Unsurprisingly, yields have stagnated. In the case of key cereals, they are often as low as half of China’s, and far lower than those in the rich countries.

The gathering agrarian crisis in India (a fate increasingly shared by much of the developing world) is a ground ripe for the foreseeable takeover of agriculture by the world’s leading transnational agribusinesses who intend to mechanise and industrialise it with more intensive use of fossil fuels, use it to experiment with and launch GM crops banned in the West, and multiply their already overflowing profits. Space limits me from establishing the thesis more conclusively that the unprecedented crisis in Indian agriculture is planned to make small-holder agriculture economically ruinous, so that the latter makes way for globally influential megacorps to ultimately take over.

In India the setbacks to growth are arriving at a time of historically unprecedented global rise in the prices of key commodities like food items (especially cereals) and oil. It is unreasonable to expect that in a globalised economy, with closely integrated financial markets and interlinked markets in commodities (especially food, agricultural raw materials, minerals and energy), India can be safely insulated from the fortunes of the rest of the world, particularly the economies of the US, the EU, Japan and China.

This is even less likely when successive governments have not taken responsible steps towards maintaining and strengthening safety nets for the Indian poor in the insecure world that has been created by globalisation. On the contrary, under the dictates of the World Bank and the IMF successive Indian governments have been busy dismantling the set of institutions and policies which were instrumental in enabling the poor to survive prior to 1991. India has entered the storm of globalisation without a life-jacket.

The impact on the availability of affordable food is particularly telling in the present predicament. Under guidance from the World Bank, since the late-1990s more “precise” targeting of families below the poverty line has been attempted, to ensure more fair distribution of scarce food. However, as has been widely noted, the location of the poverty line is a politically convenient one (allowing families at the poverty line well under the minimum daily nutritional requirement stipulated by the UN), severely underestimating the number of the poor. According to journalist P Sainath’s recent reports, based on government records, less than 1% of people living in Mumbai’s huge Dharavi slum are “poor”, and there are only 141 poor people between Dharavi and Colaba in South Mumbai!

The per capita availability of foodgrains in India has declined from a post-independence peak of 510 grams in 1991 to 422 grams in 2005.

Thanks to the conditionalities imposed by the Bretton-Woods institutions, successive Indian governments have all but undone the public distribution system for food for the poor. It has been argued that food subsidies lead to “inefficiencies”. They have also been withdrawing from procurement (till the food crisis has jolted them into changing course, at least temporarily), to make way for private grain traders, flimsy arguments about efficiency again being used to justify the change.

A system of food supply management that had evolved to a degree of considerable practical sophistication and efficacy has been wound down to please India’s creditors in Washington. As the government has been withdrawing from procurement and distribution of cheap food, the poor (both in their capacity as small farmers and as modest purchasers of food) continue to suffer evermore.

Famine is not the only manifestation of food deprivation. Malnutrition is the typical form in independent India. Since it is a lot less dramatic, it thrives without attracting much public attention. It is rising discernibly, from an already alarming base (almost half of Indian children, as per the latest National Family Health Survey, are malnourished). In every social strata below the “Incredible India” elite, families are having to accept reductions in the quality or quantity of their daily dietary intake. Even middle-class households in urban areas have had to cut back recently on the number of evenings in the week when they could eat green vegetables, often settling for potatoes as a substitute.

Also, there are continuing pressures from the highest offices to bring prices in India into harmony with world prices. It is this sort of integration with the global economy which is likely to bring further havoc for salaried and poor Indians in the near future, as prices continue to rise for key items around the world. In other words, even if growth is undiminished, it will continue to be exclusive since it will be based inevitably on plenty of price-rationing, leaving those unable to afford essential items increasingly outside the pale. “Subsidies” (unless they are disguised ones for corporations to hive off) are not popular with our policy masters in Washington.

The timing of the global inflation in food prices is uncanny. Barely had the Bear Stearns collapse driven financial markets into a panic, food prices accelerated their already upward trend, leaving behind the more than plausible hypothesis that investors are desperately in search of alternatives to financial paper for their huge speculative capital in a deregulated era of excess liquidity. In a context where the housing boom too has collapsed in the US, commodities – oil and food in particular – offer themselves as the natural target for speculative investors to park their money.

In plain English, in an effort to stimulate economic growth over the past several years, the US Federal Reserve has allowed far too much money to be created, often in ways which it has simply not been in a position to supervise or regulate, a condition unprecedented in history. When this excess money does not see itself multiply very easily through investments in financial assets or speculative mortgage-backed securities, where does it go? One of the natural areas towards which it gravitates is the set of (relatively less perishable) commodities like oil, cereals and other agricultural products which can be speculatively traded in futures markets with great profit. This leads, simply put, to hoarding of essential commodities.

Speculation in commodities – not just in the wider global context but also within India – has arisen as a key area for financial investment. It is being done by large banks, financial companies and hedge funds, institutions that have enormous power to shape the fortunes of the world. Crucially, governments around the world have been led in recent years to deregulate markets in grain and commodity futures. (A “futures” contract is an agreement between two parties to transact at a pre-determined price at a future date.) In India, in April 2003, the NDA government had lifted the ban on forward trading in 54 commodities, including agricultural commodities.

The matter is bad enough if small traders engage in it. But when big corporations and hedge funds are involved in multi-million-dollar trades every day in grain and energy futures, governments get paralysed. We hear our finance minister railing almost daily against small traders who may be hoarding grain in order to make a killing as the price gets higher. We never hear him ask how much grain is being held by big global players in India like Cargill, Archer Daniels Midlands and others. We know that in India, the limit for the amount of grain that can be stored for private trading was raised from 10,000 to 50,000 tonnes not so long ago.  Shouldn’t the citizenry of a democracy in the throes of a food crisis be entitled to know how much grain is being held back in private stocks by big traders? Needless to add, to get such information out into the public domain would be to “give the game away” from the private traders’ point of view. The game thrives precisely on uncertainty and asymmetries of information on different sides of the market.

Many observers believe that the Forward Contracts (Regulation) Amendment Ordinance, 2008, promulgated in February 2008, is the primary cause of the recent price rise in India. The bill seeks to remove the ban on forward trading in commodities on which restrictions have applied since 1952. It also legalises complex instruments like “commodity derivatives” (which enhance profit-making possibilities from speculation) and “options” (to buy/sell certain stocks of commodities). Options are speculator-oriented instruments, not in the interests of poor consumers.

Surprisingly, the state-appointed committee on the impact of futures trading on wholesale and retail prices, headed by Abhijit Sen, reached the conclusion recently that there wasn’t a strong correlation between futures trading and the rise in food prices. However, in its 17th report, the Standing Committee on Food, Consumer Affairs and Public Distribution pointed out that “no positive economic purpose is going to be served by these options and derivative contracts, but would be a misallocation of scarce resources.” It said that the intended benefit of forward markets was not being realised by farmers, in whose name the ban on forward trading had been lifted. Such trading had introduced instability and further marginalised small farmers, apart from multiplying without limit the speculative potential of agricultural markets. 

It is true that a good chunk of the explanation for the price rise is to found in global trends. But global trends would have had much milder consequences in India with a caring, watchful economic policy mindful of the enormous dangers that globalisation poses to vulnerable communities at home. Kow-towing to corporate interests and loyally carrying out the commands of the IMF, the World Bank and the WTO in almost every major area of the economy (here one may especially recall food and agriculture policies) has only made it certain that India would suffer the same fate as the rest of the world.

The government’s firefighting measures

In an effort to not lose the electoral battle before it is begun, the UPA government has been busily implementing a whole set of ad hoc measures to tackle the price rise. Some are supply-side measures, while others are intended to attack the demand side.

It has, for instance, placed a ban on forward trading in certain commodities. Recently it has imposed a ban on futures trading in soybean oil, rubber, chickpeas and potatoes. (Last month, the Abhijit Sen Committee did not recommend extending the ban to other food commodities.)

Rice exports, other than basmati, have been banned – adding to the list of countries which have exposed themselves to the “starve-thy-neighbour” criticism made of them by many an observer. (The truth is that the root causes of the price rise are far deeper, even if it is true that restrictions on the export of rice by many Asian nations may be aggravating the situation.)

Import duties on items like edible oils have been removed – with strong disincentive effects on communities like the coconut-growers of Kerala. (Our farmers can do with more consistent price-signalling for their cropping decisions.)

The prime minister has said more than once recently that the Indian policy towards biofuels – ultimately planned to be planted (believe it or not!) on 12 million hectares out of a total net sown area of about 142 million hectares of arable land nation-wide – will have to be reconsidered. Surely India cannot be criticising the US administration for using good farmland for growing biofuels while allowing itself (an immeasurably poorer country) the luxury!

The future of globalisation: Terminating the trade fetish

Food and energy prices do not show any signs of coming down any time soon. Even without this recent inflation three-quarters of South Asia was having trouble making ends meet and about half was suffering from one or another degree of serious malnutrition. Now, after the onset of food price inflation, for the first time since independence, hundreds of millions of poor South Asians may be staring at the terrifying prospect of famine in the near future unless governments have the courage to change radically the character of economic policies and put an end to the abysmally short-sighted treatment given to agriculture in the years since the end of the Cold War and the advent of globalisation.

The global food crisis is, above all, yet one more manifestation of the failure of the “free” market dogma, certainly to the extent that it is driven by the murky, deregulated world of global finance and its frequent crises. As the UN Special Rapporteur on Food has pointed out, two decades of flawed government policies the world over (South Asia loyally toeing the party line) have brought us to the precipice. The so-called “multilateral” institutions set up by the rich countries to purvey their shared commercial interests have much to answer for having pushed their policies of structural adjustment upon poor, debtor nations to suit the interests of creditor countries in the name of “free” markets. Those policies have short-changed farmers and precipitated agrarian crises in poor countries. The moral responsibility for starvation deaths and famines in the near future will lie at the doorstep not only of governments but also the IMF, the World Bank, the WTO and the interests that guide their agendas and policies.

Above all, if there is to be any serious reckoning with the food-related catastrophes on the way, there has to be a fundamental rethinking of government economic policies the world over. In the post-Cold War era of corporate globalisation, one-sided policies have been pushed on vulnerable countries in the name of market efficiency for the past two decades. The harvest is there for everyone to see now.

Even otherwise balanced writers on the topic have been led in recent years to advocate “trade for trade’s sake”, leading to some strange conclusions. In a 2002 interview to London’s The Guardian, Professor Amartya Sen had described any concern with self-sufficiency of food production in a poor country as a “fetish”, which was quite besides the point in a world open to trade. However, as so often happens, when economists retain theoretical textbook assumptions of “ceteris paribus” (“all other things remaining the same”), they not only misread the world but also propose false remedies to its problems. The facts and events of the past few years have exposed the dangers of adopting Sen’s approach. It is flawed on several counts.

Firstly, as India’s entry into the world food market on the buying side over the past few years made evident, a “large” buyer immediately has the effect of raising the world price of food. Ceteris does not remain paribus. Secondly, the present food crisis is not artificial, though it may be aggravated by hoarding (by corporations or countries). In other words, there is a supply-side problem, globally. It is led by man-induced changes in the world’s climate which are having deleterious effects upon food productivity. In a real world in which the Australian Wheat Board forewarns of its inability to export wheat to needy nations, food is far from readily available at any exporter’s doorstep. So every country has to worry about its food security: there is no one looking out for the poor and needy.

Thirdly, in a real world in which the consuming habits of the rich have profound consequences for land-use patterns, it is far from clear that the rich nations will grow the surplus cereals needed by the poor (albeit subsidised shamelessly by their respective governments). The chances of them growing biofuels to run SUVs for the rich are much higher, especially since the returns would be much greater. Again, Sen’s assumption that food supplies from abroad are simply there for the asking is misplaced. Indeed, if the experience with the World Bank in India in recent time is an indication, farmers in poor countries are being offered subsidies to grow biofuels for the rich!

Fourthly, Sen’s argument suffers, if one may borrow his own phraseology, from a “trade fetish” that economists are particularly subject to. It’s as though the mere fact that a good is traded must add to its value. In mainstream economic theory voluntary exchange benefits all parties concerned. This naïve result is drawn upon to recommend all sorts of “free” market policies around the world. It leads to some serious perils in the sort of world we have come to live in. For instance, is it worthwhile importing food from abroad even if it is marginally cheaper? What happens when the price of oil rises and neutralises the cost advantage? What if it doesn’t and many countries continue to choose the import option while none has to pay the full cost of oil production and use (including its external costs in the form of emissions etc)? In the latter case, are we not setting ourselves up for ecological harm?

Finally, in the 2002 interview Sen argued that self-sufficiency in food was only an important issue during war-time and since there was no threat of war any time soon, developing nations did not have anything to worry about. Strange that a claim like this could go unchallenged in the era of resource wars that has been inaugurated by the US since the First Gulf War in 1991! There is more reason than ever before to be concerned about such things when leading, powerful US war planners have promised us a “long war” as a sequel to the global war on terror. In any case, it is hypocritical to expect poor, vulnerable countries to stop worrying about food security while allowing rich nations lavish billions to secure themselves.

Will governments wake up to their moral responsibilities (and for that matter, their political future) soon or will the world’s food supply become a hostage to the organised greed of global finance and agribusinesses entirely, not to forget the slipshod shenanigans of pundit economists?

Affected poor communities around the world have been out in the hundreds of thousands on streets in dozens of countries over the past year, protesting the rise in food prices. The army has been called out in many countries to lend the civil forces “a helping hand”. India and South Asia are likely to see more than their share of political unrest in the months to come unless governments and the technocratic decision-making establishment draw humble lessons and are willing to change course radically.

In India, with elections closing in, the ruling coalition has one more chance to realise that for once political opportunism and public interest coincide entirely. Will it stay loyal to its corporate constituency? Or will it show greater political sagacity and moral rectitude? We shall know the answer soon.

References and sources of data can be obtained from the author.

InfoChange News & Features, June 2008

Comments (1)

Written by Alankar JNU, on 24-06-2008 06:49 This is one of the most insightful articles along with the one titled 'Predatory Growth' by Prof Amit Bhaduri (very easy to search on Google). Makes each one of us feel more empowered to think, speak and act against the injustice happening in the world and India particularly in the name of globalisation, economic reforms, high growth, liberalisation, etc. A must read also for all of us who are or remain formally untrained in the discipilne of economics.

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