Economic pandemic disruptions and Commodities Price Risk Mechanism

Price Risk Management fund is an important economic concept especially in emerging economies like India.

Commodity Price fluctuations especially in Oil, Rubber etc. impact the allocation of resources in countries like India. The volatility in the prices of such commodities in the international markets affect the prices in India.When the gyrations of price of movements are carried into the economy there will be steep fall and rise in the local prices, which affect the consumers by distorting their incomes.This in turn affect the allocation of resources over the medium term and long term as depressed prices drive out further investments in Oil etc and inflated prices bring in increased investments which may become unviable after some time.

Inorder to buffer the violent fluctuations in the prices when the international prices are high govt collects Price Risk Management levy from local producers and keep it in a separate kitty and then when international prices are low give the money out of it to local producers inorder to compensate them for low prices in the market.But the tricky question is when to start this levy . For this many theories abound and my simple take is to take a medium term view of 6 months to 3 years of the prices. When prices are below or above the median line, we should start this.

So now the levy of additional excise on petrol and diesel should be collected and used as Price risk management fund and not for immediate use for fighting Covid 19 despite huge temptations to do that.

We already have such a fund for all other commodities also -Rubber ,Cotton etc.

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