Wise decision to remove price control on rice
Farmers
Various parties have tried to portray the government’s decision to abolish the control price for rice as a defeat, a betrayal of consumers, a surrender to the paddy mill owners, a foolish act, an understanding of the reality, or as a wise decision. Most of such ‘framing’ seem to have been done on preconceived notions, in partisanship or out of ignorance. The purpose of this article is to analyse this decision from a distance with an independent eye.
Precarious situation of the
country, Govt.
It is a well-known fact that the ill-advised decisions taken by the government at the outset of this problem have put consumers, farmers, the economy as well as the government in a precarious situation. When it comes to consumers, they had to pay a higher price than the control price when buying rice, which was even higher than the price that prevailed before the price control was introduced. Farmers who had low yields, especially due to lack of fertiliser, were unable to sell paddy and earn a sufficient income to cover their production costs. Also, they were on the verge of giving up paddy cultivation in the coming seasons as they did not have the opportunity to sell their paddy harvest at the highest price they were offered. Although the mill owners were willing to buy paddy at a higher price than the government guaranteed price, they could not do so without incurring losses due to the price controls which had been imposed on rice. Some mill owners even hid their stocks of rice to make ‘undue’ profit. The government had to use force to get the hoarded rice stocks to the market. The mill owners also were unable to use the full capacity of their mills. There were signs of the country sliding into an era of rice distribution on a ration/quota system. The government was compelled to import rice at a high cost (e.g., from Pakistan) using scarce foreign exchange to ensure food security. The government, too, was in an embarrassing situation as its popularity and credibility plummeted. (The writer has published three previous articles explaining the issues pertaining to the rice problem).
At present the control price imposed on rice has been removed. The advantages and disadvantages of this decisionare as follows.
Theoretically, there will now be room to determine a competitive price for rice based on the market demand and supply. If the market is competitive then the price thus determined is an ‘equilibrium price’ because, at this price both the consumers and manufacturers (farmers and millers) will be ‘satisfied’. All the disadvantages and disruptions mentioned in the previous paragraph will be avoided. Isn’t this a better situation for farmers, mill owners, consumers, the government and for the country?
However, there remains two disadvantages of removing the price controls. The first is that consumers must pay a higher price than the control price. We need to pause a little and ask ourselves; did we actually get the amount of rice we needed at the controlled price? Didn’t we have to wait in queues at Sathosa to receive the rice at the control price? Didn’t we buy the extra rice we needed from the black market? Wasn’t the price paid in the black market even higher than it was before the control price was imposed? We must think about these.
To reduce the hardships that will be faced by the people who have no income or very low income, the government should provide additional financial assistance (a rice allowance) to them through Samurdhi or through other means to cover the difference between the previous control price and the new market price. The writer in his previous articles suggested a methodology that can be implemented by the government to provide such financial assistance without burdening the Treasury.
The second disadvantage is that we may have to pay an unfair price for rice due to the monopolistic grip of the mill owners. This can happen when a monopoly (one mill owner) or an oligopoly (several mill owners like in Sri Lanka) control the production and supply of rice. It is very clear that the owners of the main rice mills are using their market power to set the prices of rice. There are several measures that the government can take (without price controls) to prevent this from happening. The main ones are:
1. Encouragement and facilitation for registering of more rice mills to increase competition in the rice market.
2. Prohibition of ‘collusion’ among rice millers and their ‘price-fixing’. If there are no suitable laws at present in Sri Lanka, new laws should be passed by the Parliament immediately making price-fixing unlawful. It will then be illegal for large mills to set prices. Mill owners will then be forced by law to allow free markets to decide prices competitively. For example, under Section 45 of the Competition and Consumer Act of Australia, any agreement, understanding or activities that reduce market competition are illegal. “The Competition and Consumer Act prohibits contracts, arrangements, understandings or concerted practices that have the purpose, effect or likely effect of substantially lessening competition in a market, even if that conduct does not meet the stricter definitions of other anti-competitive conduct such as cartels” (See https://www.accc.gov.au/business/anti-competitive-behaviour). The Australian Consumer Affairs Commission has successfully prosecuted businesses under this Act. You may use a search term such as “legal cases” within their website to find such cases.
3. Issuing licences with quotas to everyone who is willing to import the country’s pre-estimated import requirement of rice. Let the importers make a business decision and bear the business risk of such importation. This will not only help to maintain the supply of rice in the country and assure food security, but also will maintain a price ceiling to protect the consumers. To do this, it is essential to estimate the harvest for the coming season / year and issue licences to importers only to import the estimated deficit (take as an example the current system in Japan). If there is an adequate production and supply of rice in the country, it is not necessary to issue such licences during that season / year. This is a task that should be done systematically by relevant officers.
4. Making sure that the Paddy Marketing Board is carrying out its intended role efficiently and without corruption. The guaranteed price for paddy is there to protect farmers. If the mill owners buy paddy at a higher price, it is a good outcome.
Instead of setting a control price for rice, the above measures can be effectively used to stop the mill owners from unjustly raising/fixing the price of rice.
It seems that most people in Sri Lanka consider that the price controls on rice and on goods like milk powder, dhal, gas mean the same thing. This is not correct because the ultimate result is not the same. Sri Lanka imports almost all milk powder, dhal, and gas. Therefore, the price we pay (money) goes overseas as income for producers of those goods. In contrast, the price we pay for rice goes as income for farmers and millers within our country. Therefore, the removal of the price on rice is quite reasonable from this aspect too. It is going to be very helpful to the country’s economy.
Based on the above reasons, it can be concluded that the removal of the control price on rice by the government is a wise decision. It is promising to see the government departing from its rigid policies when the reality sinks in. But this is only the first step. The next immediate step is to get appropriate new laws passed in the Parliament if they do not exist already. This requires a careful study of the laws of developed democratic countries with competitive open markets. In addition, the actions suggested above (i.e., 1,3,4) also need to be implemented soon in good faith.
(The writer is a former Head of the Department of Finance and Financial Planning at Deakin University, Australia. He can be reached at sameka50@gmail.com).