Demand slump: Farm items’ price fall raises rural pain fear

March 11, 2020 6:30 AM

Retail inflation scaled a 68-month peak of 7.59% in January, as food inflation remained in double digit for a third straight month despite month-on-month moderation

According to Credit Suisse, the trend of lowering food prices could cause a return of agriculture income distress. (Representative image)According to Credit Suisse, the trend of lowering food prices could cause a return of agriculture income distress. (Representative image)

By Prabhudatta Mishra

Increased supplies and some demand destruction caused by Covid-19 have of late resulted in a correction of prices of food items including vegetables, non-perishables like cereals and sugar as also chicken and egg. This could give some relief to the Monetary Policy Committee (MPC), which is struggling to find room for a rate cut amid elevated inflation, even as growth pangs weigh heavily on its mind. However, the drop in prices of food crop could adversely impact rural consumption which apparently has shown signs of revival lately.

According to an FE analysis, mandi prices of essential perishables – tomato, onion and potato – have declined in the range of 21-38% in February. A declining trend is also evident in mandi prices of maize, arhar, chana and masur (see chart). Market prices of these and a host of other crops are ruling below the respective minimum support prices (MSPs). As fresh rabi crops will hit the market early next month, realisations by farmers may reduce further unless the government steps up procurement at minimum support prices.

According to Credit Suisse, the trend of lowering food prices could cause a return of agriculture income distress. “After two years of mid-single-digit growth in agriculture incomes, FY20 had seen 11% growth, but this may revert in FY21 to low single-digit growth,” it wrote. Inflation rate rose faster than urban inflation for the first time in 19 months in January; this was cited by a section of economists as being indicative of a revival in rural demand.

Retail inflation scaled a 68-month peak of 7.59% in January, as food inflation remained in double digit for a third straight month despite month-on-month moderation. Chief economic advisor KV Subramanian recently forecast that CPI inflation could drop to 4-4.5% by July, asserting that the latest spike is substantially driven by volatile vegetable prices and an unfavourable base.

In fact, the MPC did anticipate the softening of food inflation. According to the minutes of its February 4-6 meeting, “Going forward, the inflation outlook is likely to be influenced by several factors. First, food inflation is likely to soften from the high levels of December and the decline is expected to become more pronounced during Q42019-20 as onion prices fall rapidly in response to arrivals of late kharif and rabi harvests. Higher vegetables production, despite the early loss due to unseasonal rain, is also likely to have a salutary impact on food inflation.”

The recent sharp fall in global crude prices is also beginning to have a sobering impact on domestic inflation, especially since a decline in diesel prices would cut freight costs. The MPC observed that “crude prices are likely to remain volatile due to unabating geo-political tensions in the Middle East on the one hand, and the uncertain global economic outlook on the other”.

Under the assumption of a normal south west monsoon in 2020-21, the MPC had revised CPI inflation projection upwards to 6.5% for Q42019-20; 5.4-5% for H12020-21 and 3.2% for Q32020-21, with risks broadly balanced. At the last review, MPC resolved to keep the repo unchanged at 5.15% – it had cut the rate at October bi-monthly review by 25 bps – and “continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target”. The MPC will meet on April 1-3 for the next policy review.

A record kharif grain harvest on the back of normal monsoon showers and an all-time-high horticulture output improved farm prospects in the second half of this fiscal. A favourable base on top of it pushed up GDP growth for the third quarter to a decent 3.5%, the highest in six quarters and against 2% a year before.

The forecast of a bumper rabi crop augurs well for the first quarter of the next fiscal, when harvesting will take place. However, the decline in prices due primarily to a demand slump could play spoilsport. The decline in consumption of milk, eggs and chicken also could hit the agriculture gross value added (GVA).

The fall in chicken prices due to rumours related to coronavirus has affected the poultry feed demand resulting in continuous decline in maize prices, while tur and chana production set to increase in 2019-20 crop year (July-June). “The overall supply scenario is very good in all the major food crops as monsoon was also above normal in 2019. The major challenge for the government is to ensure MSPs,” said VM Singh, convenor of All India Kisan Sangharsh coordination committee.

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