Low food inflation adds to BJP’S political worries
It also creates headwinds to aggregate demand, offsetting investment benefits
The Central Statistical Office recently released inflation figures for March. It shows that the Consumer Price Index (CPI), India’s benchmark inflation measure, grew at the slowest pace in 2018-19 since 2012-13, the period since when we have the new series data. The data also shows that inflation has been much lower under the present government than its predecessor. The Bharatiya Janata Party (BJP) has highlighted low inflation as one of its biggest economic policy achievements. India’s monetary policy was officially tethered to an inflation targeting framework under the present government. The BJP has promised to use the gains of keeping inflation under control to ensure low interest rates in the future. This has the potential to lower the cost of investment and hence promote growth.
But there is more to the story. Food inflation growth fell to 0.7% in 2018-19, which means that food prices did not increase at all in the last one year. For vegetables, the inflation growth is negative. This is bound to have put a significant strain on farm incomes. Wholesale price inflation statistics suggest that the slump in farm prices last year was the worst in the last 18 years. The short point is: Current farm distress is a direct by-product of low inflation in India. What is also noteworthy is that core inflation — the non-food, non-fuel component of the CPI basket — has actually increased between 2017-18 and 2018-19. This means that the non-farm-dependent sections of the economy have continued to experience an increase in prices of their products.
The temptation to keep inflation under control to promote growth and investment is not unjustified. However, no government can afford to achieve this by putting a squeeze on farmers’ incomes by keeping food prices depressed. It will also create headwinds to aggregate demand, which could neutralise the expected tailwinds from higher investment. The long-term solution to this is to create non-farm jobs and significantly increase agricultural productivity to ensure adequate food supplies at low prices. Any attempts to achieve the latter without the former will only add fuel to India’s simmering rural discontent.