Friday, June 17, 2011

Fair Price Shops. Fair to whom ?

On a walk the other day, I spied a shop that was a "fair price shop". There are many of them dotted around cities and towns in India. They are usually shut with a "No stock" board hanging in front. They are part of government initiatives to sell foodgrains and vegetables at "fair prices". They are not ration shops, mind you, which are designed to sell subsidised grains to the poor. These are shops where you and I can buy as well. At "fair prices".

Begs the question, fair to whom ?

Here's Economics 101 for the economically challenged. Prices are fixed by supply and demand. A willing seller and a willing buyer together fix the price. As long as there are many sellers and buyers and as long as there is information on what everybody is buying and selling at, the price that is so determined freely is what is a "fair" price.

But to Rajalakshmi, a fair price is a low price. Nothing wrong with buyers wanting the lowest possible price, but that can't be necessarily termed as fair. According to her, the "poor" farmer is being cheated by nefarious middlemen who is then overcharging her and making obscene profits. It is still fashionable in India to rail against all middlemen and term them as hoarders, blackmarketeers, racketeers, and such other colourful terms.

This is complete bunkum. The one market in India that is reasonably close to a perfect market is the one for foodgrains and vegetables. The more perishable the commodity, the more perfect the market. With the advent of mobile phones, farmers now have ready information of wholesale market prices. They usually shop around for the best prices they can get - gone are the days where the villainous middleman could pay the farmer a pittance and sell at the market a kilometer away at a fortune. The middleman has little elbow room to make huge profits. Prices are now very transparent in wholesale markets and price fixation is virtually impossible - the next market is only some 50 kms away and the mobile phone instantly relays prices there.

Speculating is real tough. Commodity and futures markets are in infancy and not a factor. Hoarding in the anticipation of better prices is equally challenging. Firstly storage space is non existent or extremely expensive (India is a country of third world prices in everything except land and property which are above first world prices). The economics simply does not work out. Secondly investment in storage, especially cold storage is wildly expensive. Pest infestation is rampant. That's why some 20-30% of food production in India goes waste. It simply doesn't make economic sense to hoard. And finally Rajalakshmi is the most astute of buyers. She may be intellectually challenged in other fields, but in buying food, she is the queen. If a shop sells something at 0.5% cheaper, she is sure to find out. All the ingredients of a perfect market are there.

That's why food prices fluctuate daily. And often wildly as they move in tandem with supply and demand. When prices shoot up, its not that somebody is making a huge profit. Usually supply is low because of a natural calamity or a crop failure. In that case the high price is a fair price to the producer. Consumers have the choice of switching to something else. The price is also fair to the consumer who buys at the high price because she is choosing to do so, valuing her taste for that particular item. What Rajalakshmi wants is a low price, no matter what, with "somebody" subsidising her. Well , who is that somebody ?I can argue the case for the poor being subsidised and cushioned against high prices of food. But Rajalakshmi ?  She, who is going for a pedicure ? No way.

That's why "fair price" shops remain mostly shut with the no stock sign. They are fair to nobody and are a prehistoric relic of India's dalliance with an outmoded socialist philosophy.