india

Updated: Dec 07, 2018 15:51 IST

In its bimonthly statement released on 5 December, 2018, the Monetary Policy Committee (MPC) of the Reserve Bank of India forecast a benign inflation scenario. The Consumer Price Index (CPI), India’s benchmark inflation measure, is expected to be in the range of 2.7%-3.2% in the second half (October-March) of the current fiscal year. The forecast is comfortably below the 4% target in the inflation targeting framework. This has generated hopes of a rate cut in the next MPC meeting. Lower interest rates can provide tailwinds to investment and private consumption demand in the economy. This is good news. The numbers also point towards an intensification of rural distress, though. Here’s why.

The headline CPI number is a weighted average of food and non-food components of the CPI basket. Food items have a more than 40% share in the CPI basket. A long-term analysis of the CPI shows that it is reduction in food inflation which has brought down the overall inflation number in the recent past, while core inflation (non-food and non-fuel component) has remained elevated and sticky. Therefore it is likely that low headline inflation in the future will accompany lower food inflation.

An HT analysis of overall CPI, food and beverages component of CPI and primary food articles component of the Wholesale Price Index (WPI) in the past supports this thesis. We look at WPI for primary food articles because it is a better measure of prices received by the farmers. Farmers mostly sell their output in the wholesale market.

Since November 2013, the earliest period for which monthly CPI data is available, the headline CPI number has been lower than 3.2% (MPC’s upper limit for inflation forecast for October 2018 to March 2019) in five months. Both measures of food inflation discussed above have been lower than the headline inflation number in these months. In fact, they were negative in two out of these five months.

See chart 1: CPI, CPI food and WPI primary food

This suggests that farm prices are likely to remain subdued in the near future.

Gross Domestic Product (GDP) figures for the quarter ending September 2018 displayed a worrying trend vis-à-vis farm earnings. The current price growth in Gross Value Added (GVA) component of agriculture was lower than its constant price growth, unlike the overall GVA/G DP figures.

This means that farmers have suffered a relative erosion in their incomes vis-à-vis other sectors of the economy. Difference between current and constant price GVA growth in agriculture has had a strong correlation with food inflation.

See Chart 2: Current and Constant Price GVA in agriculture and CPI-Food

Reports of farmers’ anger over a crash in prices of cash crops such as onions and garlic have been appearing n the past few days. A lower food inflation forecast means that depressed farm earnings in nominal terms will persist until March 2019. This will add to rural discontent. This is exactly the period before the next Lok Sabha elections.