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Reaping lower inflation: Strengthening agriculture can help tame prices of certain commodities

The second front on which heavy lifting is needed is setting of prudent fiscal policy by the mandarins of the finance ministry.

The economy now seems to be largely out of the shadow of the Covid-19 pandemic and only a notch better than in FY20.

Policymakers must have heaved a sigh of relief with the news of GDP growth clocking at 8.7% for the fiscal year 2021-22 (FY22). Based on compression of GDP by 6.6% in FY21, it was somewhat on expected lines.

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The economy now seems to be largely out of the shadow of the Covid-19 pandemic and only a notch better than in FY20. But the big question remains: Can India strike a similar growth in GDP in FY23? And more importantly, can India rein in raging inflation that is at 7.8% (CPI for April 2022), food CPI at 8.4%, and WPI at more than 15%?

My humble assessment is that unless bold and innovative steps are taken at least on three fronts, GDP growth and inflation both are likely to be in the range of 6.5-7.5% in FY23. Focused policy action is needed on three fronts: (1) fast tightening of loose monetary policy; (2) prudent fiscal policy; and (3) rational trade policy. Let me elaborate a bit on each one of these.

The Reserve Bank of India (RBI) is mandated to keep inflation at 4±2%. RBI has already started the process of tightening its monetary policy by raising rates, albeit a bit late in the game. The RBIGovernor says that it is a “no brainer” to predict that the central bank will continue on that path, but how fast it can move to pre-Covid levels is an issue that requires better assessment of the likely consequences of its actions on growth and inflation. Hence, a fine calibration would definitely be needed.

I would expect that by the end of FY23, the repo rate will be at least 5.5%, if not more. It will still stay below the likely inflation rate, and therefore depositors will still lose the real value of their money in banks with negative real interest rates. That only reflects an inbuilt bias in the system, in favour of entrepreneurs in the name of growth and against depositors, which ultimately results in increasing inequality in the system.

The second front on which heavy lifting is needed is setting of prudent fiscal policy by the mandarins of the finance ministry. Fiscal policy has been kept loose in the wake of the Covid-19 pandemic that saw the fiscal deficit of the Union government soaring to more than 9% in FY21 and 6.7% in FY22.

Now, there is a need to tighten the screws. Can the finance ministry bring down the Centre’s fiscal deficit to less than 5%, never mind that the FRBM Act’s advice is to bring it to 3% of GDP?

I don’t see that happening, especially when larger food and fertiliser subsidies and the cut in duties on petrol and diesel, will cost the government at least `3 trillion more than what was provisioned in the Budget. It will surely push the fiscal deficit higher than the targeted 6.4% unless tax revenues improve substantially, or the government goes all-out on monetising its several land assets and enterprises.

My assessment is that fiscal policy will remain loose, more populist and muddled, and the fiscal deficit will remain defiant, in the range of 6.5-7.5% in FY23. I don’t see it falling below 5% even by the end of FY24.

The third front is that of rational trade policy. In a knee-jerk reaction, India announced a ban on exports of wheat, restrictions on sugar exports, and there are calls for banning cotton exports. Current export restrictions/ bans go beyond agri-commodities, even to iron ore and steel, etc, in the name of taming inflation. But abrupt export bans are a poor trade policy and reflect only a panic-stricken face of the government.

A more mature approach to filter exports would be through a gradual process of minimum export prices, and transparent export duties for short periods of time, rather than abrupt bans, if at all such steps are desperately needed to protect the consumers.

However, even with these restrictions/bans on exports, I doubt if the government can tame inflation which is a global phenomenon today. Can India insulate itself totally from the global economy? Can it stop exporting all products where prices are going up, from mangoes to maize to fish to spices?

A prudent answer to moderate inflation at home lies in liberal import policy, reducing tariffs across the board. Just to cite an example, given CPI inflation has been very high and defiant in the case of edible oils and fats (17% in April), India has reduced tariffs (on palm oil, soya oil, and sunflower oil). But the tariffs on rapeseed and cottonseed oils remain prohibitively high at 38.5% for crude and 49% for refined. The domestic price of mustard oil has gone up by more than 47% in last two years (global prices are up even further), yet our import duties remain at astronomical levels in the name of atmanirbharta. It is very evident this does not work.

If India wants to be atmanirbhar (self-reliant) in critical commodities where import dependence is unduly high, it must focus on its two oil imports, crude oil and edible oils.

In crude oil, India is almost 80% dependent on imports, and edible-oil imports constitute 55-60% of our domestic consumption. In both cases, agriculture can help. Massive production of ethanol from sugarcane and maize—especially in eastern Uttar Pradesh and north Bihar, where water is abundantly available and the water table is replenished every second year or so through light floods—is a good way to reduce import dependence for crude oil.

And in the case of edible oils, a large programme of palm plantations in coastal areas and the North East is the right strategy. Some beginning has been made on these lines, which needs to be doubled up. But if we want to tame food inflation on a sustainable basis, we need to invest in raising productivity and making agri-markets work more efficiently. There are no short-cuts.

(The writer is Infosys chair professor for agriculture, ICRIER)

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