Rural distress: The deflation in farm prices
The fall in inflation, especially food inflation, has been welcomed by consumers. But what of the producers? While falling inflation is desirable from the consumers’ perspective, it hurts farmers’ income. Lower wholesale inflation indicates that farmers may not be getting adequate returns for what they produce. That is the reason we are seeing farmers campaigning for higher prices and loan waivers.
The accompanying chart—which shows the change in the wholesale price indices for pulses, oilseeds, spices and vegetables—captures the extent of the fall in farm prices.
But it is by no means the whole picture. For instance, among pulses, the price of Arhar is down 45% in April from a year ago while Urad is cheaper by 29%. Among spices, the price of dry chillies has fallen by 26% from a year ago while the price of dry ginger is down 16%. Among oilseeds, soya bean prices are down 24% year-on-year. Among vegetables, potato is cheaper by 41% from a year ago and onion prices are lower by 12%.
The Reserve Bank of India’s monetary policy statement on Wednesday said, “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. Propelled by significantly higher arrivals in mandis relative to the seasonal pattern, prices of vegetables also fell markedly from July and bottomed out in January 2017, 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.”
It’s no wonder then that farmers have been asking the government to buy their pulses and onions to prop up prices. As Nikhil Gupta, chief economist at Motilal Oswal Securities Ltd, pointed out, “In the last few years, simple average growth in MSP (minimum support price) of kharif crops has been around 4% annually, much lower than 13% growth in MSPs seen during 2010-2013. However, given this government’s focus on inflation, it is unlikely that the government may oblige with a significant raise in MSPs.”
Will the low food prices continue then? RBI’s monetary policy statement says, “Incoming data suggest that the transitory effects of demonetisation have lingered on in price formations relating to salient food items, entangled with excess supply conditions with respect to fruits and vegetables, pulses and cereals.”
And the policy statement adds, “The prices of pulses are clearly reeling under the impact of a supply glut caused by record output and imports. Policy interventions, including access to open trade, may be envisaged to arrest the slump in prices.”