Essential commodity prices and market economy: Reactions and realities

DILLI RAJ KHANAL

The strong reaction from industrial and business community as well as some others after the government’s announcement of a fixed price policy on fifteen essential commodities obligating the business community not to charge above the maximum retail prices is still continuing. Expectedly, the reactions are grounded on the notion that price fixation is opposite to the philosophy of market economy and hence some have even termed this step as an attempt to introduce some kind of command economy. This demands more debate and discussion.

As is well known, market economy is advocated and justified on the ground that it by ensuring, among others, the allocative efficiency of resources that augments higher productivity and growth in an economy. For interplay of market forces freely, elimination of exchange and price controls is regarded to be the key. But to materialize, it is necessary that there is perfect competition in both factor and product market as argued by the proponents. For this, it requires that both buyers and sellers are equipped with market information and do not influence prices. Similarly, it is also essential that there is freedom of entry and exit including the absence of scale economies, absence of product differentiation and freedom of resources mobility from one place to another, among others. But this idealistic situation does not exist in the real world. The question is to what extent the system is moving or is closer to such a direction.

Experience, however, shows that along with dominancy of free market system globally, the monopolistic tendencies have heightened. History shows that market failures have been some time more devastating than government failures. The Great Depression of 1929, great financial crisis of 2008 and ongoing serious multiple crises in the areas of debt, energy, food and environment clearly demonstrate this. The irony is that along with boom in stock, bullion and commodity markets added by jump in food prices again, the recessionary trend is continuing globally. This means that various unfair means and paradoxical tendencies are on the rise today leading to jeopardizing of demand and supply based market rules. Therefore, if markets failures were spelt out and means to correct lapses were initiated, these may strengthen market system, not otherwise. The question is whether the moves are opposite or positive to that direction.

A closer look at the functioning of the market system in Nepal in general and prices in particular indicates that many deficiencies are aggravating and violating the market rules despite aggressive deregulation, open up and free market policies. If the policies and prices behaviors vis a vis output and supply tendencies, including external driven factors, are closely analyzed little compatibility is found. Amidst tight fiscal and monetary policy aimed at economic and price stabilization, price rise is now the biggest problem in Nepal today. In the last four years, total price rise was above 40 percent coupled with around 55 percent rise in food prices as indicated by the central bank data. Similarly, no apparent link between the food production and food prices is found. For instance, in 2010/11 rise in food price was almost 15 percent as against 4.5 percent rise in agricultural GDP.

Likewise, despite domestic prices affected by price movement in India, the divergence is quite astonishing. As data reveal when prices are higher in India, price rise in Nepal is more than proportionate and when they are low, no similar pattern is found in Nepal. Despite introduction of anti-monopoly law one decade ago, it is almost defunct due to incapacity to abolish cartelling and syndicate system. As an off shoot, the vegetable, fruits and other small producers as well as consumers are reported to be much exploited by the middlemen or brokers due to, among others, lack of proper supply or value chain system linking production place and market centers. Truly, the strike and bandhs are also instrumental to price rise. But the lapses in the market system together with supply bottlenecks are major constraining factors.

In many countries, price fixation of essential commodities is most common. In parallel, fair shops for providing essential commodities to the identified card holders at lower than market prices are also common. Similarly, procurement of essential commodities is strong which also helps to contain price manipulations in the market. In India, in addition to these, the government is now introducing food security act for providing food to the people below poverty line at very low prices.

In our context also, a comprehensive strategy may be needed that could enhance production, correct market anomalies and improve distribution system including safeguarding of poor people from those who manipulate the market for quick gains by taking advantages of weak market institutions and poor regulatory system. The present small step by the government may not be considered as opposite to the market economy. It may help to enhance fairness in the market system. The problem is how to evolve built in scientific criteria of setting prices of essential commodities and monitoring of the program effectiveness.