People are generally happy when prices are low; they feel even better off when prices are falling. But that could be a nightmare for the economic policy makers? Rising prices can be fought back; but it is impossible to tackle falling prices. Japan, for example, is fighting deflation for two decades without much success.
We have been familiar with rising prices and politics around it. For the last two years, prices have been benign. But in intervals we have had very low inflation or even deflation. Inevitably the government of the day claimed credit for it, and there is nothing unusual about it.
The latest consumer price index, released on February 12, shows very low inflation of 2.05 per cent, which is well below the Reserve Bank’s target rate of 4 per cent. And worse still for India now, food prices are falling rather too fast for comfort. The latest consumer price index, which is an indicator of retail prices, has touched a low not seen since June 2017. Food price inflation rate has been put at (minus) 2.17 per cent for January this year.
This comes on the back of another spot of price deflation in December 2018.There is nothing to crow about this phenomenon. A closer look at the disaggregated inflation figures would reveal that the CPI fall is due mainly to the disinflation in food prices. Among those items which saw a fall are particularly fruits and vegetable prices, eggs have also tumbled.
The data shows at the same time an achievement and a failure. Farm production has risen substantially and Indian agriculture has demonstrated its agility. Coupled with this, we have failed the agricultural sector by trailing in creation of farm infrastructure. Because of acute shortage or outright absence of say cold storages or refer vehicles for transportation of perishable items from harvests to the markets, larger production is immediately depressing prices.
Instead, if the storage facilities and transportation linkages were in place, the higher production could have been held back for a while rather than being dumped. Thereby, the prices would not have been under pressure. Take for instance the case of broccoli in the Delhi markets. Until recently, broccoli was such a rare item that it used to fetch fancy prices like Rs 200 per kg a few years back. The cultivators took note of the price and moved over to growing broccoli, mostly in Himachal Pradesh.
Many of the markets in Delhi are inundated with the items and it selling at less than Rs 50 a kg. Side by side, in the fancier localities, it is still being sold at around Rs 80 for a kg, demonstrating the rigidities in the markets and distribution networks. Another item is peas.
Beautiful long peas are selling at Rs 15 to Rs 20 per kg which sells for no less than Rs 60 to Rs 70 kg later in the year. And frozen peas are sold for Rs 150 in summer. It is not too difficult to guess that the farmer is hardly getting any price worth the name, Sometimes these do not cover even the costs.
But only a handful of intermediaries are earning the cream to the extent they can hold. The rest getting wasted. No wonder that India is having one of the highest level of post harvest wastage. Hypothetically, consider a situation in which large organised retail chains, including the massive foreign operators, were allowed free play in the market. These large companies could invest equally humongous amounts to create the storage and marketing facilities. These networks could have smoothened the kinks in the chain.
Falling or rock bottom prices for a wide range of farm products, as is being witness currently, has obvious other macro-economic implications. Prices of staple grains have remained flat for a long time as we have by and large overcome food scarcity of an earlier time. But low prices suppress rural demand and thus we miss a major source of domestic demand. Established wisdom of granting ever higher MSPs for the major grains has had only limited impact. The move might have served the objective of being politically correct; but beyond that it has hardly achieved any meaningful economic objective.
These are at best another form of a subsidy. Inflation, like body temperature, should be positive but not too high. A little inflation shows that the economy is buzzing with income and activity. For sure, food prices will start northwards trek in a few months when the summer strikes hard and vegetables production takes a dip.
But these price trends amply demonstrate the need for action soon from a long-term perspective. That is not simply a formula for emergency compensation but nurturing a holistic market structure for farm goods. Also ago-based industries in the growing areas for processing perishable commodities near the centres of production could ultimately help.
Anjan Roy is a freelance journalist. Views are personal.