The government has recently fixed maximum retail prices of 15 essential commodities ranging from rice and flour to pulses. Although rampant black marketeering of these products, leading to their sharp price hike, has been cited as the reason for enforcing the decision, such an approach infringes upon the free market economic policy that the country has pledged to uphold. We are firmly against such activities that limit competition. The basic concept of free market economy is that the situation of demand and supply should determine prices of everything. Agreed, the latest strategy was introduced because unethical practices of carteling and black marketeering—that lead to artificial price hike of essential commodities—were creating holes in pockets of middle- and low-income groups. But these are supply-side constraints created by multi-layered intermediaries.
These intermediaries are currently ruling the roost and creating distortions in the market as all commodities have to pass through them. This is hurting both producers and end consumers, since these intermediaries often do not offer fair price to producers and raise prices of commodities as the product goes down the chain to end consumers. So far, no one has been able to control their activities because they are indirectly receiving political protection. While the Bhattarai administration has talked up free market principles, what is happening on the ground gives a lie to its commitment to a free-market economy. Even if the government had the best of intents in setting the price of essential commodities in this festive season, the practice would still be wrong. As the decision seems to have come without consultations with relevant stakeholders in the market, it risks being seen as a desperate populist move of a caretaker government.[break]
Without removing the intermediaries, the government’s decision to enforce maximum retail price (MRP) will only compound problems, leading to severe shortage of commodities that are now within the ambit of MRP regime. This is because the government does not know whether its latest policy undermines the production cost and profit margin of producers, as many agricultural inputs have to be imported and agricultural subsidies are very limited. If producers realize MRP does not cover their production cost, they will simply stop growing these products causing these vital commodities to disappear from the market. Another drawback of the MRP regime is that the government does not have an effective mechanism to monitor market prices. What if the prices of the commodities in MRP regime fall suddenly or increase sharply? In both the cases, the producers and end consumers will bear the burden of the losses.
The best way to tackle the problem of skyrocketing food prices is to reduce the layers of intermediaries in the market. This means the many walls between producers and end consumer must be removed. An example of this was recently set by Bhat-bhateni Supermarket of Pokhara, which started purchasing vegetables directly from farmers. This ensures fair price to both producers and consumers. The government will do well not to meddle in this natural relationship between the buyers and sellers.
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