In this Moneycontrol Deep Dive, we will focus on both sides of the coin. The food inflation figures and the figures that remain often hidden amid reams of data. The farmers themselves.
On December 17, 2018, Harsh Damodran wrote a piece in The Indian Express about persisting low food inflation in India and what it could mean in economic and political terms. And in December 12, 2018, the Telegraph also published a piece that almost had the poignancy of a Bimal Roy film.
The piece was titled as," Hidden figures: The numbers show absolute deterioration in the condition of farmers." Unquote. And in this Money Control Deep Dive, we will focus on both sides of the coin. The food inflation figures and yes, the figures that remain often hidden amid reams of data. The farmers themselves.
So how is the country's agrarian health?
Agrarian issues get sporadic attention in the mainstream media, and as the news cycle gets preoccupied with headline grabbing economic data, low food inflation figures, pre-election sops, controversies plaguing the RBI and the CBI, what remains unaddressed are questions about the future of India's farming community.
Prabhat Patnaik who wrote the Telegraph piece is Professor Emeritus, Centre for Economic Studies, Jawaharlal Nehru University, New Delhi. And he focuses on exactly those questions and discusses the farming community's demand for assured remunerative prices in the context of a march that was organised by the All India Kisan Sabha and other allied groups in New Delhi on November 29, 2018. The demand voiced at the march was for a pro-farmer legislation in Parliament.
The point raised by Prabhat is that there is a yawning gap between perception and facts. We quote, "There are occasions when one suddenly becomes aware not just of the inadequacy of economic concepts for understanding reality but even of their obfuscating role. One such occasion was the recent kisan march in Delhi. The peasants have been facing distress for long, which has resulted in more than three lakh suicides over the last two-and-a-half decades, in growing indebtedness relieved only by occasional debt-waivers, and in a mass exodus out of the agricultural sector which has swollen the reserve army of labour in towns." Unquote.
As he explains, a commonly used indicator in the economics of changes in peasant well-being is the movement in the net barter terms of trade between agriculture and industry which is the movement in the ratio of agricultural to industrial prices compared to some base year. A movement of this ratio against agriculture is supposed to indicate a worsening in the condition of the agriculturists compared to the base year, while a movement in favour is supposed to indicate the opposite.
The piece goes on to inform that an index of the ratio of these two prices shows hardly any decline in the agricultural prices relative to the industrial prices and this data contradicts the grass root reality of peasant distress. And the convenient deduction is that peasant distress is not as bad as it is made out to be. And as the writer says, that perception invalidates the demand made by the kisan march for an increase in the procurement prices because, that, it is argued, will inconvenience the net buyers of foodgrains.
This argument, is flawed at many levels. As the writer says, " The agricultural price that is used for measuring the terms of trade does not refer to the price that the peasants actually get. In fact, no information is available in any official source about the farm-gate price, or the price that peasants actually get. We have official data on the minimum support price and procurement price declared by the government, and about wholesale prices, apart from the various consumer price indices, but not about producers’ prices; and the crude measure of the terms of trade given in official sources is based on wholesale prices. Since one of the main complaints of the peasants aired at the kisan rally was that the price they get is only a fraction of the wholesale price, to deny their distress by citing a measure based on the wholesale price itself is absurd." Unquote.
Secondly, he explains, the industrial price that appears in the crude terms of trade calculation in official statistics is also the wholesale price, which differs from the retail price that the peasants have to pay when they buy industrial goods.
Third, the piece goes on to state, goods, which are covered in the calculation of the wholesale price index for industry are not the same as the basket of goods that the peasants buy, either as inputs or for consumption.
And finally, lest we forget, the writer reminds us, industrial goods are not the only ones that the peasants buy from outside; in fact, a very important part of their consumption basket consists of services such as healthcare and the education of their children, and the prices for these services are not covered in any terms of trade calculations and inter-sectoral terms of trade statistics, therefore, are totally irrelevant for assessing peasant distress.
We quote, "Since all incomes derived from agriculture have their origin in the value added in this sector, if we deflate the per capita value added figures by the consumer price index for rural India, which we can get from official statistics, then we can get a better idea of movements in peasants’ real incomes than what terms of trade figures can possibly give." Unquote.
Other factors like interest and debt repayment by the peasants who also have to deal with increased cost of living are not captured through the consumer price-index. The index thus understates the rise in cost of living.
As the writer says, " The demand for amelioration in their condition through providing assured remunerative prices, therefore, is perfectly justified. As for its impact on the prices paid by the final consumers, including the net buyers of food in rural areas, it can always be taken care of through an appropriate increase in food subsidy." Unquote.
And now let us talk about as the Express piece puts it, how food prices lost their bite.
Where food inflation stands now?
Harish Damodaran presents an overview of the last two years or more — especially post-demonetisation in November 2016 — in the context of food inflation.
For 27 months running, he says, from September 2016 to November 2018, consumer food inflation in India has been ruling below general inflation. In five of these 27 months — May, June and July 2017, and then October and November 2018 — the annual increase in the official consumer food price index has been negative, meaning Indians are paying less for vegetables, pulses, sugar or eggs now than a year ago.
The writer says and we quote again, "Simply put, the last two years or more — especially post-demonetisation in November 2016 — have been extraordinary for food inflation. It has remained not only below 4 percent in all but three months (November 2017-January 2018), but also consistently lower than overall consumer inflation. The latter gap has, moreover, widened since the start of this calendar year (see chart). The latest November consumer food inflation number, at minus 2.61 percent, is almost 5 percentage points less than the corresponding general CPI increase of 2.33 percent." Unquote.
This kind of sustained low food inflation, he says or even deflation is, perhaps, unprecedented in India’s history. Its implications are both economic and political.
For one, he says, the Reserve Bank of India repeatedly gets its inflation forecasts off the mark. He offers a detailed expansion of this statement and we reproduce it. For the July-September 2018 quarter, the RBI’s monetary policy committee had projected general Consumer Price Index inflation to average 4 percent, whereas the actual figure was 3.85 percent.
The October rate of 3.38 percent, by its own admission, “turned out to be unexpectedly low”. And with the latest November inflation print at 2.33 percent, the debate is no longer on whether the RBI will cut interest rates, but when and by how much. This “over-achievement” in meeting its inflation target/forecasts is partly on account of oil — brent crude collapsing to $ 60-61 per barrel, from the early-October highs of $84-85. But it is also equally due to food and beverages, which have a combined weight of 45.86 percent in the CPI.
And now to the protagonists we usually overlook. As the writer points out and we quote, "The political fallout of low/negative food inflation is agrarian unrest. While cheap food may be good for consumers, it also translates into low produce prices for farmers. The apparent rural backlash against the ruling BJP began roughly after May 2017, when the rabi crop planted just after demonetisation was being marketed. Both May-July 2017 and October-November 2018 — which preceded the recent Assembly elections, in which the party tasted defeat in Madhya Pradesh, Rajasthan and Chhattisgarh — have been periods of food inflation sliding into negative territory." Unquote.
It would be prudent to recall what the opposite end of the spectrum looked like. As the writer reminds us, it wasn’t, too long ago, when these rates were at double-digits for 22 consecutive months, from April 2012 to January 2014. We quote, "At that time, it was consumer anger that did the Congress-led UPA in. There was very little that the RBI, too, could do then to control prices of onions or tur dal. Inflation targets were invariably overshot." Unquote.
The reason causing the present scenario
As the piece explains, causing food inflation to decline markedly in the recent period are supply-side gluts, resulting from bumper domestic harvests as well as low global prices — which have rendered the country’s agricultural exports uncompetitive, even while increasing vulnerability to imports.
We quote, "The effects of this have been magnified by the current government’s supply-side management — imposition of export and stockholding restrictions on farm goods, alongside allowing duty-free imports — to complement the RBI’s inflation targeting policy. Such actions were seen particularly during the first three years of its term: In 2016-17, India imported a record 6.61 million tonnes (mt) of pulses, despite domestic output soaring from 16.35 mt to an all-time-high of 23.13 mt. Given the sheer supply overhang, it’s not surprising that the wholesale price index for pulses in November 2018 is below its same-month level of not only 2017, but even 2016 and 2015." Unquote.
However, supply may not be the only trigger.
The article asks if a slowdown in income growth could also be affecting consumption though a clearer picture can emerge only after results of the National Sample Survey Office’s next comprehensive household consumer expenditure survey comes out.
Another factor could be liquidity dimension. We quote, "Farm commodity trading in India has traditionally been cash-based. There is anecdotal evidence to show that demonetisation, in combination with the goods and services tax, has made traders less inclined to buying and stocking up produce during the harvesting season, with a view to profiting from price increases. Daily limits on cash transactions and the fear of being “watched” by revenue authorities are seen to have contributed to a general lack of “sentiment” in mandis. While cash may have returned to the system, it isn’t circulating as freely as before. All this has, of course, mainly hit farmers who are today selling in a market devoid of liquidity and buyer confidence." Unquote.
The lack of nuance in the inflation numbers
On December 17 2018, Niranjan Rajadhyaksha, research director and senior fellow at the Mumbai-based IDFC Institute, wrote in Mint how India has been able to narrow the inflation differential with other emerging markets over the past few years since RBI’s monetary policy committee (MPC) was formed.As he says, " Inflation has averaged 3.9 percent, just a whisker below the medium-term target that has been set for the MPC by the government. This number is worth underlining at a time when Shaktikanta Das has taken charge as the new RBI governor. Inflation has collapsed to its lowest level in November, and the MPC is under fire for misreading the inflation tea leaves.
The problem with simple averages is that they hide important nuances in the data. Headline inflation has been volatile in this period, ranging from 6.1 percent in July 2016 to 1.4 percent in June 2017.
This volatility is partly explained by developments such as the demonetisation shock, the gyrations in the global energy market, and the secular decline in food inflation since June 2016. Other complications have included the transition to the new goods and services tax (GST) regime and the effect of higher house rent allowances for government employees on the rent component of the consumer price index." Unquote.
He points out that the trend in core inflation—calculated after the effects of volatile items such as food and fuel are removed from the headline inflation number—is a bit different. Average core inflation over the past 30 months has been 100 basis points higher than four percent. Expectedly, core inflation has been less volatile than headline inflation.
An earlier Plain Facts column, he says, by Tadit Kundu, had shown that RBI has been overestimating inflation, an error that other central banks have also made in recent years. The April 2017 monetary policy report was way off the mark in its inflation forecasts, the October 2017 one did a better job, while the April 2018 also seems to have overestimated inflation.
He writes, " One defence of the central bank could be that it was blindsided by the gyrations in food and fuel prices, but that does not take into account the fact that the RBI inflation forecast framework explicitly deals with core food and fuel price trends though separate equations.So forecasting non-core prices is an important part of the overall model. Also, there is no standard format for reporting inflation forecasts. For example, the MPC sometimes provides inflation forecasts for a specific month, sometimes for different quarters, sometimes for half a fiscal year.
This lack of standardization makes analysis difficult." Unquote.
Is a macro perspective at the cost of micro realities?
The writer says that Indian macro policy—fiscal as well as monetary—has not done a bad job in bringing domestic inflation closer to global levels but the acid test will be passed when inflation expectations get anchored near the inflation target, so that temporary shocks to prices do not need hasty interest rate responses.
Pallavi Nahata wrote on December 13, 2018 on BloombergQuint that a fall in retail inflation is typically good news for the Indian economy but just as high inflation can be worrying, low inflation too is not all good for all concerned. The former hurts consumers; the latter hurts producers.
As she points out , "The current bout of low inflation is being led by falling food prices, leading to concerns of rising distress among the farming community. A break-up of the inflation data shows that three categories — vegetables, pulses and sugar — account for a bulk of the decline in food prices. Of the three, the pulses category has seen negative inflation for more than a year. Sugar, too, has shown disinflation for about a year, while the disinflationary trend in vegetables is more recent." Unquote.
She cites Shubhada Rao, chief economist at Yes Bank, who said that both lower global prices in some of these categories and the impact of the online trading platform for commodities (e-NAM) could be playing a role in keeping food prices low.
Data compiled by BloombergQuint shows that spot prices of onions, potatoes and tomatoes, constituting the highest weightage among vegetables in the inflation index, have seen a marked decline in price over the course of the past year. Onions and tomatoes are trading at one third their price when compared to a year ago. The price of potatoes has held up better in comparison.
Pallavi breaks down some of the categories and the reason why the prices are falling.
She cites Tushar Arora, senior economist at HDFC Bank who says, "In case of onions, it is largely an issue of supply management . For tomatoes, an import ban from Pakistan (50 percent of total tomato exports were to Pakistan alone) has tilted the balance in the market.
In the case of pulses, high domestic production because of government supported prices and a rise in imports have distorted the market dynamics. A pick-up in procurement in the coming months and possible promotion of exports in this segment could help contain the price decline.
For sugarcane, prices are decided by the government. But since final sugar prices are determined more by demand and supply dynamics, there is an imbalance." Unquote.
And the political subtext cannot be ignored.
As Soumya Kanti Ghosh, chief economist at State Bank of India points out in the piece, 13 states had negative food inflation in October and among these are states like Maharashtra, Andhra Pradesh and Haryana. Each of these are major agricultural states, which are headed for elections in 2019.
States have already announced farm loan waivers worth Rs 1.2 lakh crore. If you look at the states going to elections in the next year, where food prices inflation is negative, you could see an additional Rs 50,000-60,000 crore in farm loan waivers.
The soon to unfold General elections have also revived the debate about farm loan waiver in the face of low inflation (crop prices) and declining rural wages.
We quote the piece, "More farm loan waivers, if announced, will add to fiscal strains at the Centre and the state level. This, in turn, could eventually add to inflationary pressures in the economy. Such waivers are also typically seen as negative for the credit culture and for banks." Unquote.
A broader perspective
National Institute of Public Finance and Policy published a paper in 2015, by Rudrani Bhattacharya , Assistant Professor, National Institute of Public Finance and Policy, New Delhi, India and Abhijit Sen Gupta, Economist, India Resident Mission, Asian Development Bank, New Delhi, where sustained high food inflation had been discussed as an event with significant welfare implications in India. We quote, "Food comprises 45 percent of the consumption basket. With 21.9 percent of the population, or about 270 million people, living below the poverty line, already consuming food below the subsistence level, sustained high food inflation has negative consequences. Effective stabilisation of food inflation, therefore, is of utmost priority, which makes it imperative to understand its causes and consequences." Unquote.
So as is obvious by now, stability between high and low inflation is necessary for overall agrarian health and the well-being of Indian economy.
As Sayantan Bera wrote for Mint on September 14, 2018, low food inflation numbers have brought cheer to the consumers but do not bode well for the farmers who are battling consecutive years of falling prices on the back of record harvests.
We quote, The distress in rural India is also worsened by the negative growth in real rural wages from November 2017 till March 2018. The government is taking steps to mitigate the adverse effect on farmers. In early July, the government announced new minimum support prices (MSPs) for kharif crops, saying that the aim was to ensure that farmers get 50 percent returns over costs.
It also launched an umbrella price support scheme named Pradhan Mantri Annadata Aay Sanrakshan Abhiyan, to ensure farmers growing pulses and oilseeds receive remunerative prices. This comes against the backdrop of the steps taken last year not providing respite to the farmers. Central agencies had last year procured Rs 30,000 crore worth of pulses and oilseeds at MSP from farmers as their prices plunged below MSP." Unquote.
But as Ashok Gulati, agriculture chair professor at the Delhi-based Indian Council for Research in International Economic Relations said, whether the new procurement schemes will lead to higher prices for farmers will be clear following the harvest of kharif crops and a lot will depend on the effectiveness of the government’s market interventions.Our take? Well, this is the year of the elections and farmers will wield a considerable electoral clout and we may see their concerns being addressed but again short-term redressals can only cause long term problems and what is needed is an agrarian policy that has a macro vision for the economy and also includes micro components that make India tick in the worst of times. Its unsung hidden figures who need to be respected for what they literally, bring to our table.