The electoral defeats in Punjab and Uttarakhand have rattled the government so much that it is resorting to desperate measures to curb inflation. The most recent example has been the commerce minister’s arm-twisting of cement producers to hold the price line. Other measures have included a ban on sugar exports, which have led to a crash in sugar prices, and a ban on futures trading in wheat and rice. Steel manufacturers too have been ‘persuaded’ to hold the price line. The finance minister is hinting at price controls on milk and oilseeds. It is government by diktat all over again.

It is possible, of course, that these measures will have a short-term impact on prices. The concern is with the longer-term cues that price controls send out. In a free economy, prices act as pointers to producers. Their decisions on how much to produce are based on price signals. When prices are high in a particular sector, producers expand production, other entrepreneurs jostle to get into the sector, production rises and prices fall. That is the way the free market works. But if price controls are introduced, there is no incentive to increase production and prices will remain higher in the longer term. The other problem arises from the random nature of state interventions. Businessmen do not know which commodity will be targeted next. Sugar producers, for instance, have been badly hit by the fluctuations in government policy. The role of prices as a signalling mechanism is undermined. Then there is the question of equity. Why should wheat traders be held responsible for what is actually a global wheat shortage, a shortfall in production at home and decades of neglect of agriculture by the government? Why should the shareholders of oil companies subsidize the government’s efforts at containing inflation?

Finally, there are strong doubts about the efficacy of price controls. Long experience with price controls shows that goods on which price controls have been imposed have a habit of disappearing from the shelves, only to reappear in the black market. Take the recent example of Venezuela, where the price controls imposed by the self-proclaimed ‘socialist’, Mr Hugo Chavez, have led to empty supermarkets. The problem is that 40 per cent of the rise in the wholesale price index has been on account of food and metals. The prices of these articles are set globally and the Indian producer or trader can hardly be accused of profiteering in them. What, then, is the remedy for inflation? In the short-term, it has to be contained by reducing duties and increasing imports on the one hand, and reducing money supply on the other. In the long run, the key lies in improving productivity. The government’s effort to control prices by decree sends all the wrong signals.