THE PRICE OF WAITING
You could blame it on the delay in implementing farm sector reforms. Can the government and the RBI tame runaway inflation?
Situated at the heart of Vashi in Navi Mumbai, a few minutes’ drive from the Old Mumbai-Pune highway, is a 122 hectare fruit and vegetable mandi (market), the most bustling trading venue in this satellite city. Hundreds of trucks laden with farm produce arrive here every day from nearby districts. This is the Vashi APMC (Agriculture Produce Market Committee) market, one of Maharashtra’s 305 regulated mandis, originally established to help farmers find better prices for their produce (via auctions, therefore avoiding several middlemen.) The annual trade at this 5,000-trader mandi is estimated at over Rs 10,000 crore.
Over the years, however, the APMCs have fallen into disrepute. They are accused of cartelisation, and now widely seen as a big reason for inflated food prices. This led the Maharashtra government to issue an ordinance in July this year, amending the APMC Act of 1963, to take fruits and vegetables out of its ambit. This was also a signal of the government’s intent to scrap the APMCs altogether. Predictably, traders were up in arms, shutting down the mandis for several days and leading to yet another spike in food prices. Prices of vegetables shot up in Mumbai and suburban areas—tomato prices were up over 40 per cent, cucumber 20 per cent and cauliflower about 15 per cent. Even after traders called off the strike, there was little respite for consumers; prices of fruits, vegetables and pulses have stayed high for some time now with no sign of easing.
This is not a phenomenon restricted to Maharashtra, which is among states with the highest agricultural outputs. Food prices have shot up in most parts of the country, hitting consumers hard and causing much outrage against governments, both at the Centre and in the states. In June, food inflation came in at a 10-month high, with increased prices of cereals, pulses, vegetables
Food inflation may touch 10 per cent by September. Pulses and sugar [prices] are soaring because the government refused to create a buffer when prices were below the MSP” ASHOK GULATI Infosys Chair Professor for Agriculture, ICRIER
and sugar being the major contributors. Consumer price inflation, as reflected in the retail prices of a basket of goods and services, rose to 6.07 per cent in July compared with 5.77 per cent in June. At the national level too, vegetable prices continue to rise—by about 15 per cent in May compared to a year ago. Sugar prices have leapt too; they were up 16.7 per cent in June compared to a year ago. The ubiquitous dal-roti is no longer a poor man’s meal; arhar dal prices have raced past Rs 150 a kilo. In the 14 months to June 2016, retail prices rose by 75 per cent for arhar, 110 per cent for urad and 65 per cent for chana. India is a major importer of pulses, with 30 per cent of its consumption met from imports. Left unchecked, this is fuel for public
anger; food prices have an emotional connect with people, and their reactions to increased prices of toothpaste or soap will not be as dramatic as to more expensive onions or pulses.
FOOD FOR THOUGHT
There are many possible reasons for this situation. Some point to the heat wave and drought experienced by many parts of the country prior to the monsoons, arguing that this damaged crops and hit supplies, causing prices to rise. Others blame the creaky infrastructure serving this industry, infrastructure that is at the mercy of intermediaries, who create artificial shortages to jack up prices for personal gain. Left unchecked, the structural problems in this industry are enough to put India on a trajectory of viciously high inflation, akin to what it witnessed for a decade till 2010.
“Food inflation may touch 10 per cent by September, ” says Ashok Gulati, Infosys Chair Professor for Agriculture at the Indian Council for Research on International Economic Relations (ICRIER). “[Prices for] pulses and sugar are soaring as the government refused to create a buffer when prices were below the minimum support price (MSP). Now they will pay the price.” (MSP is a form of market intervention by the government to insure agricultural producers against any sharp fall in prices of produce.) Kaushik Basu, former chief economic advisor, maintains that inflation refers to a sustained rise in prices across the board, that is, a phenomenon where the average price of all goods is on an upswing for a length of time. Inflation has been high in India for several months now, touching 5 per cent in October 2015 and remaining above the 5 per cent mark from then on except for a temporary drop to 4.83 per cent in March 2016.
Food and beverages comprise as much as 54 per cent of the consumer price index (CPI) basket (see box: Inflation Decoded), which is why the current upturn in inflation is being blamed on high food prices. The other possible causes are rising rural wages, as well as government policies such as price support and the rural unemployment guarantee scheme. Some experts believe the monetary and fiscal stimulus following the 2008 financial crisis
led to higher inflation, while others cite supply-side constraints arising from policy bottlenecks. “If the present inflation persists and gets entrenched in the system, it can be a problem,” cautions Dharmakirti Joshi, chief economist with credit rating agency Crisil. The only silver lining is the plentiful rainfall in India this year.
MONSOON RELIEF?
New research from financial services firms such as Nomura Financial Advisory and Société Générale S.A. shows that there’s no evidence that a bad monsoon necessarily results in higher food prices. India’s food inflation numbers between 1996 and 1998, for example, were high even when the country had a good monsoon. And between 1999 and 2005, despite below-normal monsoon rainfall, inflation was largely contained. “Although good rains are expected to reduce the price pressure, it also depends on how well the food supply chain performs,” says Ajit Ranade, chief economist with the Aditya Birla Group. “Right now, there is a lot to be done on the supply side of the [agricultural] value chain.”
Pronab Sen, the former Chief Statistician of India, explains that since 2002, prices have consistently risen despite good monsoons and bountiful harvests. This is a period during which India witnessed a reduction in poverty—rural wages rose faster than inflation and the poor diversified their consumption basket, increasing demand. Supply has not kept pace, leading to increased prices, and in the process, hurting consumers, perhaps the urban middle class worse than others. Urban wage growth has trailed behind inflation and protests against food prices are an urban phenomenon. “It’s a big middle and lowermiddle class squeeze,” says Sen.
Biswajit Dhar, professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University in Delhi, agrees: “It is clear that food inflation has to do with the speculation taking place. Demand and supply have to meet to lead to price formation. In this case, there is demand, but supply is 10 middlemen away.” Ashima Goyal, professor at the Indira Gandhi Institute of Development Research in Mumbai, says that the causes of inflation are largely seasonal, indicating shortages in specific agricultural commodities. “But they do point to the need for ongoing reform in agricultural marketing and supply. There was a mild increase in oil prices also, which has been reversed,” she adds.
Other lurking dangers are the possible inflationary effects of the implementation (in August 2016) of the 7th Pay Commission—which, some experts argue, might increase demand via the increased buying power of central government employees—as well as the impact of the Goods and Services Tax, which the government wants to implement by April 2017. While the rate of GST has not yet been decided, the broad consensus is it should be in the region of 18 per cent. “GST [even] at 18 or 19 per cent would be inflationary, since the tax on services is only around 15 per cent at present,” says Ranade.
RBI’S BIG BATTLE
One of the major reasons that some functionaries in the Modi government differed with outgoing RBI Governor Raghuram Rajan was the latter’s
hawkish position on controlling inflation, and his decision to target retail inflation (using CPI) as opposed to wholesale inflation (WPI) (see graphic: A Tale of Two Measures). The jury is still out on which of those makes for a better benchmark, but the newly reported levels of inflation will be a source of concern for Rajan’s successor, Urjit Patel. High inflation can sour public opinion of government as quickly as persistent unemployment does. “While the major action has to be on the supply side, monetary policy can be effective in bringing down inflationary expectations,” says Goyal. With complementary supply-side action, an inflation target can serve as an inflation-anchoring device which, even with mild tightening, does not choke growth, she adds.
During his tenure at the central bank, Rajan waged a largely successful battle against inflation, but in the bargain, also drew criticism that he was stymieing growth by keeping interest rates high. A common refrain now is: should the new RBI governor revert to the old benchmark of WPI, which is currently far below the CPI—the measure Rajan had chosen to target?
FARMGATE REFORMS
The government has adopted an inflation target of 4 per cent (in terms of CPI) for the next five years under the monetary policy framework in consultation with Rajan, with an upper tolerance level of 6 per cent and lower limit of 2 per cent. This outlines the task for the six-member monetary policy committee, chaired by the next RBI governor, which will set interest rates keeping this target in mind. “To attain the target of 4 per cent, India needs to fix the [agricultural] ecosystem,” says Joshi. This would include cutting waste through better logistics, scrapping the APMC and bringing farmers directly in touch with consumers.
Shaktikanta Das, economics affairs secretary at the Union ministry of finance says the main components of inflation have been the prices of pulses, vegetables, milk and eggs. “We are following two years of very poor monsoon, and that has impacted production of various crops,” he says. He claimed that the MSP of pulses has been significantly increased, and the government has put in place a very robust mechanism for procurement. “There is a plan to import more, and the government has also approved the building of a buffer stock at an opportune moment,” Das said, adding there is also budget provisioning exclusively for pulses. These measures, he says, aided by a good monsoon, will cool food prices. On pulses, Das claimed, there has been a “significant increase” in the acreage under cultivation. “A group has been constituted by the government to enhance production of pulses, and the agriculture policy is taking note of changes in consumption, laying a big emphasis on pulses.” Longterm arrangements are being made for imports of this crop, and the government is also considering increasing the quantum of its buffer stock.
The timing of government intervention is also crucial in maintaining price stability. “I am not sure if the government is capable of differentiating between price smoothing and black marketing/hoarding. If the government intervenes too early, it can lead to a crash in prices,” says an economist who has been at the helm of policymaking in India. For some experts, the fact that food price inflation has been contained below double digits is a pointer to supply-side improvements. However, there is resistance to reform in agricultural marketing. The latter, together with improved rural power and the spread of cold storages/processing, can reduce future spikes in vegetable prices, experts say. Samiran Chakraborty, chief economist, India, at Citibank, says the effects of a good monsoon on vegetable prices will be felt in December. He also expects the inflation rate for pulses to drop to a single-digit figure.
At a time when the country is already battling weak business sentiment at home, rural distress and falling exports due to a global slump, the worry of persistent inflation will hurt. With manufacturing in the doldrums, a sustained revival of the agriculture sector will be critical for India to keep inflation closer to target levels and achieve the growth it hopes for.