Falling numbers, rising prices

Subir Roy

Subir Roy
Senior Economic Analyst

Alarm bells must be ringing along the corridors of power in New Delhi. Food inflation hit an unbelievable 14.1 per cent in December, at the head of a relentless rise for nearly a year from near zero (0.3 per cent) since March last year. However, policy-makers can take some comfort from the fact that this spurt in prices has been largely caused by vegetable prices shooting up by 60.5 per cent. Since very heavy rains late last year played a role in this, they can hope that as the normal weather pattern is restored, food inflation will ease up.

But the problem with such an understanding is that pulses also played a role. Their prices went up by 15.4 per cent. Now, pulses have been the regular contrarian in the average Indian’s food basket. India has traditionally relied on imports to keep prices of pulses in check as they constitute a key intake, the main source of protein for the poor man.

What is more, with climate change rapidly accelerating, unpredictable weather is becoming the norm rather than the exception. So, this is going to pose a huge challenge for policy-makers. How to safeguard the economy from the unpredictable? This may imply holding buffer stocks at levels not previously undertaken.

Food prices are important because of the impact they have on consumer prices as a whole. Inflation, according to the Consumer Price Index, has been benign, keeping below the Reserve Bank of India’s target of 4 per cent, through most of last year till September. Thereafter, there has been a steady rise through the last quarter (October to December) to reach a high of 7.4 per cent in December.

We see a pattern between the two through the last two years. Inflation has been trailing food prices. Both food prices and inflation have been falling through 2018 and rising through 2019. Thus, in the recent past, when the government has been able to take credit for keeping inflation low, it has been able to do so, courtesy low food prices.

The problem is that the government has had very little control over food prices which have been driven more by the weather. So, its ability to keep inflation low was partly fortuitous.

The real problem is what this has done to farmers. Through the period that food prices were low, along with that of some other agricultural commodities, farmers were in distress. This found reflection in poor rural consumption. Now that food prices are rising, farmers will heave a sigh of relief but the government will have to address rapidly the escalating inflation.

The way out is to weaken the link between food prices and consumer prices as a whole. Food and beverages make up nearly half (45.9 out of 100) of the weightages in the Consumer Price Index. This means that food accounts for nearly half of what the average Indian spends.

This underlines the reality that Indians overall are still quite poor, spending a good part of what they earn on keeping body and soul together. Things will not change until incomes rise a whole lot, as the better off you get, the lower the part of income you spend on food. As things stand, substantially reducing farm distress will likely lead to an upward push to inflation. That is a central dilemma for policy-makers.

The long-standing aim of India’s agricultural policy has been to reduce its dependence on the weather. In the initial decades after Independence, this was sought to be achieved by large irrigation projects. But the limits of this became visible when the food crisis of the early sixties happened. Indian policy-makers and agricultural scientists found an answer to this through the Green Revolution which was resource intensive, using high levels of energy (chemical fertilisers) and other inputs like better seeds which came at a cost.

Now that the Green Revolution has reached a plateau and the world has before it the goal of pursuing sustainable agriculture which seeks to kick the habit of relying on chemical fertilisers and pesticides, the goal before the country and its farmers is to take up organic farming. But there is little by way of government policy to support or encourage that.

The different programmes announced by both the Central government and several states over the last year have been to directly assist the farmer so that he can raise his crop yield. For this, if he keeps following the Green Revolution technology, whatever positive results he can get, will not be sustainable. This is a dilemma which should be engaging the government.

The government is currently seized with an even more serious overarching problem — a rapid economic slowdown to a mere 4.5 per cent growth in the last quarter. With the Union Budget approaching, one option before it is to administer a fiscal stimulus — spend more, particularly on infrastructure projects so that this eventually raises the disposable income of consumers and gives a consumption-driven boost to demand and ups the growth rate. But the fiscal deficit number is a holy cow — a line that cannot be crossed.

Plus, with inflation picking up rapidly, RBI, the monetary authority, cannot lower interest rates. Hence, there can be little by way of monetary stimulus that can be expected. That is the final dilemma for the government. Not only does it have an overarching problem on its hands, there also seems to be little that it can do to resolve it.