Farmers may be paying the price for an inflation-targeting regime
4 min read . Updated: 27 Aug 2020, 08:35 PM ISTPolitical motivations to keep retail prices low have hurt their incomes and resulted in farm distress
In a few days, the National Statistics Office is expected to confirm the worst fears about India’s economy, when its estimates of growth in national income for the first quarter of this fiscal year are released. That there is likely to be a sharp contraction in national income is a foregone conclusion, with only the extent of it still a mystery. While everyone is prepared for this bad news, what is also of added concern is the upward trend in inflation. In fact, not just its headline numbers, but also inflation expectations are likely to remain elevated, going by the results of several surveys done by the Reserve Bank of India (RBI). This is what should worry our policymakers.
Like many other statistics that suffered a data collection disruption under India’s lockdown, consumer price index (CPI) data is only available for June and July, while imputed estimates have been made for April and May. In June and July, overall inflation stood at 6.23% and 6.93%, respectively, with rural inflation at 6.34% and 7.04%, and urban inflation marginally lower, at 6.12% and 6.84%. These are beyond the upper bound of 6% set by the monetary policy framework of RBI. But like many other indicators, these inflation estimates merely mark a continuation of trends that prevailed before the lockdown. Inflation was actually higher in the previous quarter of January-March 2020, averaging 6.7%. As in that instance, inflation over the past two months has been driven primarily by food prices, which were 9.2% higher than at the same point a year earlier, a rate slightly lower than 11.1% recorded in January-March 2020. Clearly, the problem of inflation for the government and RBI’s monetary policy committee (MPC) predates the onset of the covid pandemic.
But what complicates matters is that inflation remains high despite RBI interventions. This is not just true of last year, but earlier as well. Monetary policy measures have largely failed to have any impact on inflation. The real issue, however, is not about the efficacy of monetary policy measures. Rather, it is the basic premise of the contention that inflation depends on MPC actions. It is now more or less confirmed by various empirical studies, including inhouse studies of RBI, that food inflation is largely unaffected by monetary policy measures. However, that did not prevent India’s monetary policy framework from fixing an arbitrary target for inflation management.
The current CPI inflation appears to be largely a result of supply chain disruptions caused by a stringent lockdown. This is more evident in food items, which have seen high inflation in retail prices even though farm gate inflation, as measured by the wholesale price index (WPI), shows a declining trend. WPI inflation for foodgrains (cereals and pulses) has declined from an average of over 6% in the first three months of this year to 2.4% in July; fruits and vegetables inflation has declined from an average of 16% in January-March to -3% in the April-June quarter. On the other hand, milk and meat items, including poultry, have shown similar inflation trends before and after the lockdown. Inflation in retail prices has not been accompanied by an increase in farm-gate prices for farmers. Since a majority of agricultural items, including cash crops such as cotton, have shown negative WPI inflation, the earnings of farmers must have been worsening.
It is this decline in the prices of most agricultural items that should have raised alarm bells in Indian policy circles. But this trend has persisted for much of the past six years, which is even more worrying. With farm input costs rising faster than output prices, the net result has been a turn in the terms of trade against agriculture. This has partly contributed to increased rural distress. Most of these trends are somehow ignored in the larger discourse on price movements in the economy.
Part of the reason for that neglect is the political economy of inflation- targeting. Since food items have a large weight in the consumer price index, any effective strategy of inflation containment seeks to keep food prices low. This is sought to be achieved through measures that keep farm-gate prices low. The fear of inflation rising to an arbitrarily set number is used as a justification to implement austerity.
These penalize the agricultural sector by leading to a reduction in subsidies and a decline in investment, both of which contribute to raising input costs. The real cost of inflation-targeting is therefore borne by farmers, who are deprived of remunerative prices only to satisfy credit rating agencies and benefit the financial sector.
Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi
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