Consumers or farmers? Inflation fight tests Modi government in an election year

The unprecedented levels of inflation in food prices have brought the focus back on the government’s intent to raise the income levels of farmers

The Centre is walking a tightrope in its efforts to fight food inflation with consumers on the one end and farmers’ interest on the other.

The government’s frequent measures to arrest the price rise in staples ranging from onions to rice are beginning to fuel concerns over New Delhi’s intent to enhance the income of farmers, a key vote bank.

Even before official data revealed that India’s headline retail inflation touched a 15-month high of 7.44 percent in July driven by a surge in vegetable prices and staples such as cereals and pulses, the Union government had sprung into action prohibiting the export of non-basmati white rice from July 20. Since then, a series of measures have been rolled out to keep a lid on prices – from selling rice and wheat under the Open Market Sale Scheme (OMSS), subsidising the retail cost of tomatoes, to imposing a 40-percent export duty on onions.

Farmers up in arms

But farmers are not happy. While a fall in prices of tomatoes following the government’s decision to intervene in the market, including imports from Nepal, has stopped them from taking advantage of a spike in cost, the Centre’s prohibition on exports of onions has also sparked anticipation of a similar moderation in prices. Consequently, key farm groups have erupted in protests across crucial regions of the country.

Met with opposition from farmers, within 48 hours of imposing the export duty on onions, the Centre went into damage control-mode. Food and Commerce Minister Piyush Goyal on August 22 announced that two government agencies will procure 2 lakh additional tonnes of onions at a “historic” rate of Rs 2,410 per quintal, and that they could procure more if needed.

Also read: Govt procuring onions at Rs 2,410/quintal, to ensure welfare of farmers: Piyush Goyal

“All export bans and stocking limits impact farmers' incomes negatively. It only reflects consumer bias in the policy system. It is more for urban consumers who are more politically vocal. And it is at the cost of farmers. We need to correct this bias,” according to Ashok Gulati, Professor at the Indian Council for Research on International Economic Relations.

The dilemma is real for policymakers with farmers protesting attempts to arrest prices, while on the other hand, consumers are being forced to shell out more for staple food items. And, a deeper look at the data reveals that despite several interventions, Indians are still paying Rs 43 more for a kilogram of tomatoes compared to the same period last year, whereas the price of onions, which is on an upward trend, is nearly Rs 7 higher for a kilogram.

Also read: After tomato, onion prices set for eye-watering rise

The story is no different when it comes to rice. Notwithstanding aggressive price control measures, the retail price of the grain has risen nearly 11 percent on year to Rs 41.78. In fact, the Food Corporation of India (FCI) has barely found any takers through its OMSS initiative with a mere 0.38 percent offloaded of the total 5 lakh tonnes that were offered, according to the latest available data.

The effectiveness of India’s price interventions is most likely dimmed by the fact that for perishable items such as tomatoes, the problem lies in storage, as pointed out by Minister Piyush Goyal on August 22. Even the Reserve Bank of India (RBI) in its latest State of the Economy article called for "major reforms" to the country's supply chains of vegetables.

Indra Shekhar Singh, an independent agri-policy analyst, termed the price control measures by the central government as “a little too late,” adding that India’s agrarian policies have left its farmers confused.

“The current export prohibition (on onions) is mismanaged because it is going to upset farmers as well as small and medium traders who are trying to make an honest living. India needs a clear-cut export quota based on weather predictions,” the former Director of the National Seed Association of India told Moneycontrol.

Consumer Versus Producer

The Narendra Modi-led government has been betting big on farmers with a series of steps to woo one of its largest vote banks. From direct cash transfers to withdrawing three controversial farm laws faced with protests, the Centre has kept a consistent focus on pleasing farmers.

However, notwithstanding these measures, the current regime’s biggest promise of doubling farmers’ incomes remains unfulfilled. The Prime Minister during his Independence Day speech in 2017 had first announced this aim, which was reiterated in the Bharatiya Janata Party’s manifesto ahead of the general elections held in 2019.

The unprecedented levels of inflation in food prices have brought the focus back on the government’s intent to raise the income levels of its farmers, especially when the country is bracing for national elections in less than a year.

Emkay Global’s lead economist Madhavi Arora says that the increase in farmers’ incomes will be moderate as export prohibitions would mean losing out on the advantage of comparatively higher global food prices.

“A domestic player who sees global prices going up and is being denied of that may want to charge higher but he is sitting with a higher domestic supply,” Arora said, adding that terms of trade would be less favourable with export prohibitions in place.

Sukhpal Singh, Professor, Indian Institute of Management (IIM), Ahmedabad and former chairperson, Centre for Management in Agriculture (CMA) believes that though both consumer and producer interests need to be protected during such situations, the action on the producer side is generally lacking despite mechanisms like the market intervention scheme (MIS) being in place.

Advocating for a deficiency price payment in order to compensate the farmers, if the government is not able to procure certain perishable produce, Singh said, “There is no doubt that farmers should not be asked to bear the cost of protection of consumer interest and there should a price floor below which prices should not go for farmers due to any government policy action like export or import measures.”

Policy measures

Arora and Gulati feel that the need of the hour is to look at policy measures to protect the farmers, whose gains are being eclipsed due to price control interventions. While Gulati recommends using income interventions to identify and protect only vulnerable consumers instead of everyone, Arora expects the government to cushion the earnings of the farmers by enhancing existing support measures such as subsidies, or the PM-Kisan scheme, among others.

To be sure, the central government may already be thinking along these lines. According to a media report on August 22, the Centre is considering increasing the income support to farmers under the PM-KISAN scheme by Rs 2,000-3,000 per farmer household from Rs 6,000 now, and stepping up procurement under the minimum support price (MSP) to ensure rural income levels do not fall in real terms.

But while the government is seemingly planning steps for farmers, it is also ready to take more thought-out measures to control inflation, especially on food prices, evident from the comments pouring in from the Prime Minister himself as well as the Centre’s top bureaucrat, Finance Secretary TV Somanathan.

The outlook for India’s inflation trajectory as well as farm output is seemingly grim. Latest data shows that while sowing for paddy, coarse cereals, sugarcane and oilseeds have been on track, pulses continued to witness a lag with most regions of the country facing below-normal rainfall. In the case of rice, though sowing picked up recently, planting has been delayed in West Bengal due to deficit rainfall. And, with regard to inflationary pressures, the finance ministry has already warned that it may continue to stay elevated for the next few months and will require more vigilance from both the government and the Reserve Bank of India (RBI).

Food inflation cannot be ignored, a senior government official told Moneycontrol, citing the existence of tools, including the MSP ceiling to protect farmers in a situation when market prices crash.

“Food security is of utmost importance for a country like India, which has seen disasters of the likes of the great Bengal famine. We need to protect our own interests before the world's,” the official said.