India's inflation-adjusted gross domestic product (GDP) grew at 6.6 percent in October-December 2018, confirming that the economy is in a slowdown mode, a state that was already emanating from other leading indicators.
Importantly, the data points towards pain points in the farm sector, which is also something that the record low food inflation rates have been mirroring.
Real or inflation-adjusted gross value added (GVA) in agriculture grew 2.7 percent in October-December, from 4.6 percent in the same quarter of the previous year, and 4.2 percent in July-September.
The worrisome bit, however, is that GVA in agriculture in current prices grew 2 percent, sharply lower than the previous year's 9.1 percent in the same quarter, and also lower than 3.4 percent in July-September 2018.
It is not always that one finds nominal GVA at current prices is lower than the inflation-adjusted or real rates. The answer to this could well be hiding in the very inflation rates.
Latest price data showed that wholesale inflation slowed to 2.76 percent in January, primarily driven by falling vegetable prices.
The current price crash is partly due to a bumper winter-sown crop that have flooded mandis. With few buyers, the glut has forced farmers to dump products at throwaway prices to clear up a piling mount of vegetables.
This is showing up in food inflation, a proxy to measure how costly or cheaper commonly consumed items have become on an annualised basis, which has moderated sharply.
Wholesale vegetable prices, which is a gauge to measure the prices that farmers are getting for their produce, have been persistently falling over the last several months. Vegetable inflation was (-) 4.21 percent in January, growing only slightly than December’s (-) 17.55 percent.
Likewise for wholesale onion prices that have now been falling for several months. This is in sharp contrast to 2014, when the price of the popular bulb used in most Indian curries, skyrocketed to more than Rs 50 a kg at wholesale markets as weather shocks and suspected speculative hoarding by traders pushed up prices.
Vegetables, potatoes and onions do not attract minimum support price (MSP)—where the government purchases crops from the farmers at a certain assured price.
A state-supported MSP mechanism acts a cushion, cuts the dependence on private wholesale buyers, and helps fix a minimum floor price that farmers are almost guaranteed to get even if markets are swamped by an abundant harvest collapsing mandi rates.
High inflation hurts people’s buying power, while low levels can indicate poor demand and weak economic activity. Currently, it is the latter that seems to be playing out in the rural economy.
The latest GDP data shows that market prices are lower than inflation-adjusted prices. Market prices at wholesale mandis seem to be clearly ruling at significantly lower levels than the MSPs.
This is symptomatic of a lower farm income, something that lies at the core of the current rural distress in many parts of the country.