Across the aisle: Inflation is bad, but is deflation good?

By: |
April 26, 2015 12:43 AM

There is satisfaction all round that inflation has declined.

There is satisfaction all round that inflation has declined.

The decline in the rate of inflation began in November 2013 (which was the month when both CPI inflation and WPI inflation had peaked). The decline has been secular, and in November 2014, WPI inflation touched zero. The numbers published in March 2015 estimated WPI inflation at (-)2.33% and CPI inflation at 5.17%.

Happy urban consumer

None is happier than the consumer, especially the urban consumer. The happiest person is the head of the household because she is the one who buys most goods and services needed by the family. She is still unhappy that prices of some food articles are elevated: the current rate of year-on-year inflation in cereals is 2.32%, milk and milk products is 8.35%, vegetables is 11.26%, fruit is 7.41%, and meat, fish and poultry is 5.11%.

across

Behind every product or service, there is a producer or service provider. While consumers are generally happy, producers are in distress.

The worst affected are the farmers. Barring a few (who have managed to keep large holdings despite land ceiling laws), most farmers are small landholders and are poor. According to the Situation Assessment Survey of Agricultural Households (December 2013), published by the National Sample Survey Office, 40% of the households of the country are classified as agricultural households. The estimated number is 90.2 million and does not include agricultural labour (i.e. landless) households. The Survey estimated that 70% of agricultural households own less than one hectare.

The small landowner (less than one hectare) will always remain poor — unless he strikes oil or gold in his land. He needs help. He needs to supplement his farm income with non-farm income. He needs help to migrate (or enable his children to migrate) to the non-agricultural sectors. His children need to acquire an education and non-farm skills. Given a choice — and this is very sad — he will give up farming. But the vast majority of farmers do not have that choice. What will they do tomorrow if they give up farming?

Unhappy producer-farmer

Besides, the rest of the country needs them to continue to do farming and will be horrified if they abandoned farming. Who will produce the 96 million tonnes of wheat, 103 million tonnes of paddy, 18.4 million tonnes of pulses, 355 million tonnes of sugarcane, and 35 million bales of cotton that the country produced in the last agricultural year?

The farm sector is in deep trouble because of a fall in prices. Take a look at the table sourced from the Centre for Monitoring of Indian Economy. It contains the monthly average wholesale prices (that is what the producer can expect to get) across various markets in India during March 2014 and March 2015.

The decline in prices has left the producer-farmer poorer and deeper in debt. Compounding his woes are unseasonal rain, drought, thunderstorm (in Bihar on April 22), and the threat of a deficient monsoon as per early forecasts. The government has added to his woes by a paltry increase in Minimum Support Price (MSP), inefficient procurement, increase in prices of fertilisers, poor compensation for lost crop etc.

This situation did not emerge suddenly. Every government has grappled with these problems. The UPA tried to address them in different ways: introduction of MGNREGA in 2006 to supplement farm income/wages; farm loan waiver in 2008 to give partial relief from past debt; and generous increases in MSP between 2004 and 2014. The Food Security Act, 2013 was an indirect supplement to income. The Land Acquisition, Rehabilitation and Resettlement Act, 2013, was to give the small landholder an opportunity to exit willingly and migrate to other sectors of the economy. These efforts paid off and agricultural growth during 2009-2014 recorded a historic high of 4.06%. Yet much remains to be done, and every successor government is obliged to help the producer-farmers.

Deflation and its consequences

The decline in the rate of inflation could be attributed to many reasons. Presently, it is mainly due to the steep fall in the world prices of crude oil and commodities. Lack of adequate demand is another reason. Increase in productivity could lead to increase in supply and contribute to decline in prices, but there is no evidence of a sudden rise in productivity in the agricultural or manufacturing sectors. Most commentators agree that there is inadequate demand: indicators of that are low growth rate of bank credit (12.6% in 2014-15), decline in merchandise exports ($310 billion in 2014-15 as against $314 billion in the previous year), and the widely acknowledged fact of absence of new investments.

Consumers need to change their outlook towards producers. Producers must make reasonable profits; if they make losses, they will stop producing. It is profits which sustain production, employment and more investment. Reasonable price increases are the only way to reward producers, especially farmers, and if that means a reasonable level of inflation, consumers must accept it as a necessary concomitant of development.

Deflation is not an unmixed blessing. Sometimes it can be more calamitous than inflation.

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