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Tuesday, February 06, 2007

Killing The Milk Business - The GOI Way

Most mature economies control inflation by managing monetary policy. Recently deceased Milton Friedman tried to drill this into economy watchers for decades. Apparently no one in GOI is listening.

Even as Y.V. Reddy tries his best to control inflation by raising interest rates (the best way yet) and controlling money lending activities (not the best way because it's so hard to do and disruptive to banking operations), our socialist government - still is stuck in the old ways - manipulates the prices of individual items in the consumer price index inflation-indicator basket. So it bans (a favourite act of any Indian government) export of onions to bring onion prices down - one item in CPI basket - hurting the (onion) farmers one week; it bans pulses export to bring down lentil prices - another item in CPI basket - hurting the (lentil) farmers another week and so on.

Instead of allowing monetary policies to work it way through the system and let market take care of liquidity, and hence inflation, our government likes to micromanage individual levers of the economy - because it thinks its smart enough to understand the needs of each and every family in the country - just like any true socialist economy.

Now it's the turn dairy farmers. Milk prices in the CPI basket out of line - you know the drill - ban milk exports devastating producers of this perishable commodity:

Milk powder exports of 65,000 tonnes threatened, milk prices fall Re 1 a litre.

Kuldeep Saluja is an angry man. The managing director of Delhi-based Sterling Agro-Industries had exported 10,000 tonnes of skimmed milk powder (SMP) last year, and was about to invest Rs 70 crore to build more capacity and tap into a buoyant global market.

But the government’s decision last week to ban SMP exports has put paid to those plans—and sparked fresh debate about the wisdom of squeezing agricultural producers in order to protect consumers.

Not only is India the world’s largest milk producer, milk powder exports have been a booming business. Total exports ballooned from 4,185 tonnes in 2003-04 to 28,200 tonnes the following year, and 50,510 tonnes last year. This year, the government stepped in when exports were about to touch 65,000 tonnes.

The government’s argument is that exports are welcome, but fighting inflation takes priority.

Yes, yes. Fighting inflation. It's like putting out forest fire one tree at the time. Business plans, export orders, individual farmers livelihood all go out the window because milk is now the target item as per our government decree.

This is not a way to run a mature economy. Here is one way to run it.

Related blog: Ajay Shah writes about the milk ban.

Cross-posted on INI-Signal.