india

Updated: Nov 14, 2019 03:46 IST

A 4.3% contraction in the Index of Industrial Production in September has heightened worries about India’s growth in the three months ended September. There is reason to believe that a sharp rise in food prices, especially in vegetables such as onions, might have added to the current economic slowdown. Here’s why.

That the economy has not been doing well is known. How could this slowdown have impacted the day-to-day life of a daily-wage construction worker? Two possibilities exist. If he used to get work for 25 days in a month when things were better, he might be getting work for only 20 days now. Or, his daily wages, which used to rise 8% every year, may have risen by only 4% this year.

Basic requirements, even for the poorest, are constant irrespective of how the economy is doing.

These basics include food, clothing and housing. In a country like India, food is the biggest constituent of essential spending. The share of food and beverages in the Consumer Price Index (CPI) basket, India’s benchmark retail inflation measure, is 46%.

As overall incomes take a hit during a slowdown, an average worker is likely to spend less on non-essentials. What happens if food prices rise drastically at a time when incomes are already facing a squeeze due to a slowdown? Simple, the spending on non-essentials will go down even further, and perhaps even non-food essential spending may take a hit.

The most extreme manifestation of this could be malnourishment or worse, starvation. This is bound to have an adverse effect on economic growth in the non-farm sector as demand declines.

There is good reason to believe that the Indian economy might have suffered a hit in the recent period, with food inflation rising. In the quarter ending March 2019, food inflation contracted by 0.9% on an annual basis. The June quarter saw a 1.7% rise in food inflation. This increased to 3.5% by the September quarter. The increase has been much sharper in urban areas, 5.4% and 7.1% in the June and September quarter, than -0.2% and 1.5% in rural areas. Inflation data for October, which was released yesterday, shows that food prices continue to rise. Retail food inflation grew at 7.9% in October, up from 5.1% in September. It has crossed the 10% mark in urban areas. In fact, it is food inflation which has driven up headline inflation numbers in this period. Core inflation, which is basically non-food, non-fuel inflation, has actually been going down. It was 5% in the March quarter, 4.1% in the June quarter and 4% in the September quarter.

Inflation for fuel and light increased from 1.9% to 2.4% between the March and June quarters, but actually contracted by 1.4% in the September quarter. (See Chart 1)

Source: CMIE

What has driven up food inflation? It is primarily vegetables, pulses and meat, fish and eggs. Inflation for vegetables and pulses was actually negative in the March quarter and jumped in a big way subsequently. Vegetable inflation grew at 20% in urban areas in the June and September quarters.

Vegetable inflation increased to 35.4% in urban areas from 27.1% in September. In rural areas too, it crossed the 20% level in October.

The share of vegetables in the CPI basket is 6.04%, which is nearly the same as the combined 6.42% share of meat, fish and pulses.

A significant spike in these sub-categories means that consumers, especially the not-so-well-off ones, with stagnant or decelerating incomes might have been forced to divert some of their non-food spending to buying food items, leading to a fall in demand for non-food items and adversely affecting non-agricultural growth. (See Chart 2)

Source: CMIE

To be sure, this line of reasoning can be questioned. Many including this author have argued that low food inflation, which has put a squeeze on farm incomes, has contributed to the economic slowdown by hurting rural demand. Why should a squeeze on non-food demand due to high food inflation not be compensated by increase in the purchasing power of the farmers, who are getting better prices?

There is one way in which this could have happened (and anecdotal evidence suggests it has). Much of vegetable price inflation, such as for onions, has been because of crops being destroyed due to unseasonal rains. So, overall farmer incomes might have remained the same (or dipped lower) even with higher prices, with the quantity being sold reducing.

This was exactly what onion farmers in Maharashtra told this author during the assembly elections. An HT analysis by Vineet Sachdev showed that average daily arrival of onions in Delhi’s Azadpur market between 1 October and 5 November this year was 748 tonnes compared to 878 tonnes in the same period in 2018.

There is another statistic which supports this argument. Real rural wages, adjusted by Consumer Price Index for Agricultural Labourers, fell for five consecutive months until August, the latest period for which data is available.

Had rural incomes indeed received a boost because of higher food prices, rural wages should have shown some buoyancy. (See Chart 3)

These statistics can be used to make a short-term and a long-term point.

The Reserve Bank of India’s Monetary Policy Committee (MPC), when it meets in December, should not resort to monetary tightening because of a rise in headline inflation numbers, which is largely being driven by a seasonal shock in food prices. In the long-term, it will perhaps be a good idea to widen India’s food security cover beyond cereals, so that seasonal food shocks do not force the poorest to cut down on other spending.