Depressed food inflation is a worrying symptom

The inflation reported for the month of October was 3.1 per cent, the lowest in the last one year. This was a big relief, because just one month ago, there were fears that international oil prices may spike up to a100 dollars a barrel. This was because of the impending sanctions against Iran, which were anticipated to cause a shortage of at least 1.5 million barrels per day. As it turned out, President Trump’s administration chose to give a waiver to eight countries, including India, to continue to import oil from Iran. Thus, the oil shortage was postponed by at least six months. But strangely, during the next four weeks oil prices plunged by almost 30 percent, and is currently trading below 60 dollars.

The big drop in the inflation rate during October was caused by a drop in food inflation, which has turned negative. Food and beverages, including cereals, pulses and vegetables comprise 47 percent of the consumer price index (CPI). The price of vegetables and fruits is down steeply, although it is a seasonal phenomenon.

The sudden drop is causing great concern among oil producing nations, and OPEC will meet in a couple of weeks to announce a production cut, to compensate for the supposed glut in oil supply. The drop in oil prices is a huge blessing for India, since every dollar decrease in the price annually, saves us 1.4 billion dollars of foreign exchange. Imagine the savings now, if oil dropped by nearly 20 dollars on a sustained basis. The oil price drop also seems to have stabilised the exchange rate of the rupee versus the dollar, which was threatening to reach 80. It is now around 72 and may perhaps strengthen.

Hence lower inflation and lower oil prices is good news all around, for our fiscal deficit and current account deficit, the currency as well as interest rates. But wait a minute. The big drop in the inflation rate during October was caused by a drop in food inflation, which has turned negative. Food and beverages, including cereals, pulses and vegetables comprise 47 percent of the consumer price index (CPI). This sub-component of inflation was negative 0.8 percent. The price of vegetables and fruits is down steeply, although it is a seasonal phenomenon.

A video from Ahmednagar mandi showing a farmer destroying his pile of pomegranates in frustration, because they remained unsold even at 10 rupees a kilo, went viral on social media. Pictures and videos speak louder than a thousand written words. The video was poignant as it showed the farmer’s pain, but also because at the same time pomegranates sell for more than 100 rupees a kilo in the markets of Mumbai or Delhi. This is the crux of the problem. The same phenomenon is affecting onions as well. The kharif crop has been plentiful at 142 million tonnes. There is an excess supply of rice, wheat and sugar. India will emerge as the world’s largest producer of sugar this year, and even if we try to export it, we won’t fetch higher prices. The commerce ministry has announced a subsidy for the export of basmati rice. The mandatory mixing of ethanol with petrol and diesel in motor cars, will no doubt help sugarcane prices. But that will take some time. With pulses the situation is adequate, but in oilseeds India continues to be a major importer.

Low food inflation is heartening to the city-based consumer, but heart-breaking for farmers. Farm distress is already acute, reflected in agitations in various states. The recent farmers’ march of farmers from Thane to Mumbai, was a repeat of a bigger one eight months ago. Their demand is enforcing MSP, loan waiver and implementation of the forest rights act. Maharashtra has declared almost one third of its districts as drought affected.

 The minimum support price (MSP) policy was supposed to help the farmer and keep prices at least fifty percent higher than the cost. But it is just a price guarantee, not an assurance about quantity. If there is very little procurement, then the total impact of MSP is negligible. The actual market prices for most agricultural commodities remain depressed, which is reflected in the negative food inflation of October. The scheme called “bhavanter” of Madhya Pradesh, which reimburses the difference between the MSP and market price to the farmer, also hasn’t taken off. Low prices will persist in many crops, although cotton and sugar may see some recovery.

Low food inflation is heartening to the city-based consumer, but heart-breaking for farmers. Farm distress is already acute, reflected in agitations in various states. The recent farmers’ march of farmers from Thane to Mumbai, was a repeat of a bigger one eight months ago. Their demand is enforcing MSP, loan waiver and implementation of the forest rights act. Maharashtra has declared almost one third of its districts as drought affected. Many parts of Gujarat and Karnataka also have had deficient rainfall. The rabi sowing season has begun, but acreage is much lower across most crops. Some of this is because of unseasonal rains and some because of lower incomes. All this does not bode well for farm incomes. As farmers and villagers face parched lands, there may be increased migration to the cities closer to the summer months of 2019. There is also the looming national election in May next year, and falling incomes in rural areas could become a major electoral issue.

 The solution to the farm problem, of low incomes and productivity and surplus labour lies outside the sector. When the non-farming sectors are booming, such as manufacturing, construction, textiles or services like tourism then that will attract and pull away labour from the farms. This has to happen at a massive scale. A recent report from the World Bank showed that industrial employment in many East and South East Asian economies doubled as a share of total employment in the past twenty years. This is India’s missed opportunity. But this opportunity still exists, and there is room to absorb farm labour in non-farm sectors, or adjacent sectors like agro-processing. This is the long haul.

The solution to the farm problem, of low incomes and productivity and surplus labour lies outside the sector. When the non-farming sectors are booming, such as manufacturing, construction, textiles or services like tourism then that will attract and pull away labour from the farms. This has to happen at a massive scale.

But Indian society also needs to re-adjust the terms of trade between industry and agriculture, or more relevantly, between the city-based food consumer and the farmer producer. Some amount of food inflation is necessary to keep farming viable, and must be made acceptable. Of course, there are many inefficiencies to be squeezed out in the supply chain as well (as the pomegranate video mentioned above illustrates). These efficiencies will ensure that the farmer gets a much higher share of the end price paid by the consumer. Till then let’s make slightly higher food inflation acceptable to all.

(The writer is an economist and Senior Fellow, Takshashila Institution)