Price rationalization - II

The proposed Price Commission for Agricultural Sector (PCAS) should also try to ensure minimization of price shocks related with commodity supply chain disruptions - both voluntary (hoarding practices) and involuntary (climate change).

The current price hike in the agriculture sector, and industry related to it, whereby wheat flour price is witnessing an upward spike, caused by demand-pull inflation on the back of supply shortage of both wheat and flour. Whether gaps in wheat-related policy, or institutional weakness to keep in check hoarding practices, the end result is that true price signals based upon market fundamentals of demand and supply could not be materialized. Moreover, sugar prices are also following a similar pattern. There is indeed too much leeway available with economic agents operating in the agriculture sector- middlemen, cartels in wholesale markets, hoarders in related industry- to make artificially-hiked profits, on the back of weak regulation of markets.

PCAS should ensure that true price signals reach the agriculture sector for a) the unprocessed commodities or crops for direct consumption like vegetables, b) intermediate products feeding into further production like cotton, and c) processed commodities like flour, cloth, and sugar. This price commission should be made the parent authority for overseeing that no policy, of the likes of export/import related, one with regard to subsidy/procurement-related, or concerning supply-chain, is made and implemented without its approval, given the fact that it is the ultimate responsibility of the price commission to safeguard against reaching prices that do not correctly reflect market fundamentals of demand and supply, and welfare interventions into prices where needed.

For PCAS to do this, all institutions, underlying organizations, and markets in the agriculture and related industrial sector, need to come together and formulate a unified policy- one that is not entrenched in theoretical idealism of the nature of Neoliberalism, or least government intervention, but one that internalizes the specific political economic aspects that intentionally or unintentionally lead to hurdling true price signals. Competition Commission of Pakistan has a big role to play here as well, and needs to be fully on-board with PCAS. Simply assuming power by authorities is not enough unless power is duly exercised, and in the case of agriculture sector in Pakistan, there needs to be one unified effort to rationalize prices. Hence, it is for PCAS to ensure that both institutional and infrastructural apparatuses are in place and are functioning seamlessly. PCAS will also be required to ensure that these apparatuses plan pre-emptively, and act in a timely manner.

Incorrect prices are at the heart of the problem of Pakistan's economy. This factor has led to perpetuating the wealth, power, and influence of a small group of economic and political elites over time, allowing them to feed off each other through the former's ability to make artificially hiked-up profits, and for the latter to use a portion of these to run election campaign finances. The political therefore framed in parliament have made policies to keep institutions weak. Had the wheat and sugar crises been so amplified in the presence of better markets, efficient organizations or government departments, or institutions making laws that regulated appropriately? Certainly that would not have been the case. The PTI government needs to understand their near-absence here, and should approach the matter in a wholesome manner. A concrete policy should replace the habit of taking notices and crackdowns in the middle of a crisis.

At the same time, incorrect prices also mean that there are huge unwarranted profits for a few, as a result of unjustified highly inflated prices for many. This has generated a 'price fever' and resulted in a 'desperation fever' for the economic agents to safeguard themselves against insecurities that otherwise have little base - given resources are ample - if these prices are rationalized. Such price distortions have led to increasing the levels of income inequality and the magnitude of poverty over time, and have also disempowered electorate into making voting choices on the basis of reaping individualized favours from political candidates, and not selecting them purely on their capability and intention to deliver public goods. Hence, price rationalization has important consequences for rationalizing the importance of money, both in terms of necessity for economic agents, and also for improving the quality of democracy.

Moreover, compromised price signals produced in one sector in the economy have consequences for other sectors. Artificially inflated prices in the real sector, for instance in the real estate market, in turn put greater pressure on the supply of loanable funds in the financial markets; causing demand-pull inflation in the rate of interest involved, and reducing overall level of credit to the private sector due to the interest rate hike. At the same time, expensive loans mean greater cost-push inflation. Although a tight monetary policy stance to control this inflationary spiral helps control some part of this spiral, it also feeds into cost-push inflation by keeping interest rate high, at the back of high policy rate. Hence, it is important that the efforts of a price commission are supported through a balanced monetary and fiscal/governance related stance to control inflation.

Market imperfections in the financial sector, such as the artificially high profits made by banks, on the back of unjustified bank spreads, along with imperfections in the external sector where, for instance, prices of imported goods are kept unjustifiably higher than market fundamentals underscore the need for formulation of price commissions. In addition to PCAS, there is a need for the setting up of a Price Commission for Financial Sector (PCFS), and a Price Commission for External Sector (PCES). Moreover, they work with the same objective of reaching price rationalization goal, as in the case of PCAS.

In addition to the three proposed price commissions, there should be a Price Commission for Real Sector (PCRS), which works towards rationalizing prices of commodities/services other than the agriculture and agro-based industry; which in its own right is a very large and economically consequential sector, and hence needs a price commission of its own. Here, needless to say, rationalizing prices would mean that the cost of doing business would also be rationalized as reduction in artificially-hiked prices would lower input costs for businesses.

For instance, prices of energy sources like petroleum products, and electricity also need rationalization. Downward corrections will reduce both the impact of imported inflation component of fuel, and prices charged with middlemen sort of service providers; for instance in the case of petroleum products, the prices charged by oil marketing companies, and dealers' margin need rationalization. In this regard, it would make sense that PCES and PCRS work with involved government authorities and regulators like OGRA and NEPRA to improve the underlying institutional and market fundamentals, so that more than just price determination, rationalized prices could be achieved.

Price commissions will need to be put in place until institutions, underlying organizations, and associated markets are made efficient enough - through price commissions, and policy broadly - to allow reaching a lot better price signals than what are being reached currently.

(The writer holds a PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund. He tweets@omerjaved7).