One of the stories of Sherlock Holmes narrates an incident in which a racehorse was stolen while a dog was on guard and the stable door remained locked. Holmes wondered, “Why didn’t the dog bark?” The answer was simple. The stable door was opened by none other than the trainer himself. Something similar has been happening in our dear motherland.

High food inflation is no longer news in India. Over almost the last four years, it has quite often been in double digits. But now the prices of essential food items have reached such proportions that a deeper probe is necessary. A case study of wheat and pulses provides the answer.

The production of wheat was at 68.6 metric tonnes in 2004-05, it rose to 69.5 mt in 2005-06 and to 75.8 mt in 2006-07. Procurement by the government was at 16.8 mt in 2004-05, which fell to 14.8 mt in 2005-06 and to 9.8 mt in 2006-07. Thus, wheat production did not fall but procurement was drastically cut to reduce the storage cost. The Centre also gave a huge transport subsidy to private traders to sell wheat abroad from its stocks.

The twin measures succeeded in bringing down the public stock of wheat to just 1.8 mt on April 1, 2006. On July 1, 2006, the wheat stock was at around 10 mt as against the norm of 17.2 mt, while its wholesale price was 8.46 per cent above the previous year’s. The sharp drop in procurement, which had nothing to do with the demand-supply conditions, gave traders a golden chance to buy the wheat offered cheap by small farmers right after the harvest, and to go for large-scale hoarding. The buyers included multinational corporations such as ITC Limited and Cargill India.

As private hoarding continued, wheat prices began to soar and reached Rs 1,800 per quintal by end-October, 2006, from Rs 1,100 in end-March in Delhi. Again, it is the traders and the rich farmers who gained by such price hikes. Because only they can afford the large warehouses and get the backing of institutional credit, both of which are denied their poorer cousins. The large farmers gained even more as the government went on raising the procurement price rather extravagantly till 2009.

Pulses present the opposite case in the sense that the market is perpetually in short supply. Decades of stagnant acreage (20-23 million hectares) and low yield (500-600 kilograms per hectare) have led to stagnant production (13-14.5 million tonnes) and, consequently, a sharp fall in per capita availability owing to a rise in population. Fifty years back, in 1958-59, the per capita availability of pulses was 27.3 kgs, and now it is at 12.7 kgs. Even these figures hide its extremely skewed consumption pattern because of its high price and the grinding poverty of the masses. They can hardly afford pulses, their only source of protein.

Between January and June 2006, the wholesale price index for pulses went up by nearly 80 per cent. Urad had a jump of Rs 500 per quintal in Chennai around June 22, 2006. Such exorbitant price hikes within such short periods can only be explained by large-scale hoarding and speculation because the demand-supply situation cannot change so quickly. By end-June 2006, the Centre reduced the customs duty on wheat from 50 per cent to five per cent, and that on pulses from 10 per cent to nil, and decided to import about four mt of wheat. But the decisions came four months too late. In late August, 2006, the states were empowered to restrict the stock of wheat and pulses. Immediately, the futures dropped in the commodity exchanges, confirming the speculative rise earlier.

The sharp rise in the prices of wheat and pulses, and also the fact that they were being hoarded, were well-known in the trade by February 2006. Yet, precious little was done till the prices sky-rocketed in June. In the process, the grain-sharks made a killing. Hoarding of foodgrains is nothing new. It happens every year. But, from early 2006, the scale of hoarding has become formidable, which explains the continuing steep rise in cereals.

This brings us to the question of speculative funding. Thanks to financial liberalization, the concomitant of globalization, money from any source can go to any market in search of profit, in reality. The financial markets abroad and at home are such that it is well-nigh impossible to trace the circuitous route of the speculative funds from their sources to their final destinations through the various kinds of deals.

Hedge funds control more than $1.3 trillion globally — more than double the figure six years back. Even if a minuscule fraction of such funding enters the Indian grain trade on top of the domestic speculative funding, then even god cannot save us.

Earlier, such fund flows were limited mostly to stocks and real estate. But from late 2005, these funds seem to have entered the foodgrains market as well, causing havoc for the masses. If these people, numbering millions, were to spend less for their food, they could have replaced their torn dhotis, saris or old cycles earlier than usual, which in turn would have raised the industrial growth rate, the present day god, via a rise in aggregate demand.

Liberalizing the grains market without strengthening the production-distribution base is a recipe for disaster as it is. We have gone further with wholesale financial liberalization in an economy which had already been flooded with black money.

The million-dollar question now is, is it judicious for a nation which cannot boast an enviable record in money management to embrace financial liberalization so closely? The number of scams we have had since the ‘reforms’ began bear testimony to this.

After such knowledge, what forgiveness?