Falling Food Inflation And Farm Distress: Does The Data Add Up?

It is not uncommon to hear of instances of farm sector stress in India during years of drought. Agriculture in the country remains rain dependent to a large extent, leaving the sector, and those who earn a living off it, vulnerable to swings in weather patterns.

It is, however, surprising to hear of such distress when we have one good monsoon behind us and another equally strong one approaching. The explanation being given for the woes of Indian farmers is the sharp fall in prices of food items, as reflected in the drop in consumer price inflation. The data shows that consumer inflation has fallen sharply from 5.76 percent in May 2016 to 2.18 percent in May 2017. Inflation in the food and beverages category has fallen from over 7 percent in May last year to -0.22 percent in May 2017, data for which was released on Monday.

A break-up of the food and beverage category, however, does not show signs of generalised deflation extending across categories. Among the 12 segments within the food and beverage category, only two have an index level which is well below the level seen a year ago, suggesting an actual fall in prices rather than a fall in the level of inflation. By definition, inflation is the rate at which prices of goods and services are rising.

As widely reported, the sharpest fall has been seen in the indices for vegetables and pulses. Incidentally, both indices showed a steep correction following demonetisation in November. While this appears logical in the case of a perishable item like vegetables, the price impact on pulses appears linked to supply. There, most analysts point to the 37 percent increase in the output of pulses in 2016-17 compared to the previous year as the reason behind the fall in prices.

“In the case of pulses, the large-scale augmentation of supply on account of expansion in acreage, procurement, buffer stocking and imports caused a sharp decline in prices starting in August 2016,” said the Reserve Bank of India in the statement accompanying its June monetary policy review. The central bank added that prices of vegetables have also fallen due to higher arrivals at mandis, with fire sales during the demonetisation period accentuating the fall. “The seasonal uptick that typically occurs in the pre-monsoon months has been muted so far,” said the RBI.

The Rural Disconnect

While the vegetable and pulses categories are the two which have seen a fall in the index level, most other categories have shown a decline in the level of inflation. In fact, all 12 categories within the food and beverage category have seen a fall in the rate of inflation.

Categories like meat and fish have seen inflation fall from 8.67 percent in May 2016 to 1.87 percent in May 2017. Inflation in the eggs category has also fallen sharply from 9.04 percent in May last year to 0.72 percent now. Even a category like spices has seen inflation fall sharply from over 9 percent to 0.52 percent.

The broad fall in food inflation, however, does not appear to be related to a fall in income levels and hence consumption. Data sourced from rating agency ICRA shows that rural wage growth, after declining between September 2015 and September 2016, has shown a rebound to above 6 percent levels. The inflation decline is also not in sync with consumption demand indicators. While personal consumption expenditure growth slipped in the fourth quarter of fiscal 2017, it remained close to 7 percent.

This is perhaps one reason why the RBI has been cautious about the recent drop in retail inflation. “...The easing of inflation excluding food and fuel may be transient in view of its underlying stickiness in a situation of rising rural wage growth and strong consumption demand,” said the RBI on June 7 as part of its monetary policy review.

State Of States

Fears of farm sector distress have pushed the government’s of Uttar Pradesh, Punjab and now Maharashtra to consider farm loan waivers. Madhya Pradesh, too, has witnessed farmer protests.

A state-wise break-up of the inflation data shows that in the case of Madhya Pradesh and Uttar Pradesh, inflation levels have fallen into negative territory. Maharashtra and Punjab, however, continue to see a level of rural food and beverage inflation, which is higher than the national average.

The factors driving these loan waiver demands, however, may not be entirely economic. Ever since a loan waiver was promised ahead of the state elections in Uttar Pradesh, other state governments have come under pressure to follow suit. While the central government has ruled out a nation-wide farm loan waiver, a number of states may announce such schemes, said Bank of America Merrill Lynch in a report dated June 5.

“We expect almost all states to write off about $40 billion of farm loans in the run-up to the 2019 general elections following the ruling Bharatiya Janata Party's UP and Maharashtra governments' waivers,” the brokerage house said.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.