Food inflation in India has become a puzzle by its ultra-low persistence. No longer do food prices display their usual seasonal tendencies. Prices of various items, some of which were never heard to crash before, have been collapsing left, right and centre… to the point that support pricing seems to not impact any more. The twin shocks of demonetisation and GST said to have worn off, it was expected food prices would regain buoyancy with the economic cycle—motor cycles and tractors are selling well after all. But nothing of the sort happened. So what is going on? Why is food inflation so low? Has it finally, structurally turned the corner? Or does its low-level persistence owe to other reasons? This article speculates. First, it analyses the prominent supply-side narratives.
Government’s effective supply management?
From 2014, the need to restrain consumer price inflation has kept the spotlight on prices of food items, which constitute about 46% of the consumer price index. The government has proactively managed food supplies and prices through procurement, imports, stocking, releases through open market sales and public distribution, export duties and restrictions, stockholding and inter-state movement limits, anti-hoarding raids, and extensive price interventions. No doubt all these dampened food prices. However, none of these measures are durable, all are short-term. And it is an open question if excessive state intervention exacerbated volatilities. But the intense volatility and price crashes in recent years has never been as frequent or widespread before.
Permanent crop surpluses?
Recently, Harish Damodaran (The Age of Surplus, The Indian Express, June 12, 2018) argued that India has achieved enduring surpluses in most crops due to technological advancements raising yields and productivity, plus infrastructure investments in roads, electricity, irrigation and communication providing better access to markets, information and technologies. Such is the case, he says, in sugar, vegetables, pulses (minimum support and high market prices elicited strong production response here), wheat, fruits, milk, and recently, even garlic! This being so, concludes Damodaran, value realisation for the Indian farmer is the main issue for policymakers to resolve. It is possible that many talukas, few districts or some crop belts may have seen a productivity boost, but at the aggregate macro level, total production and thereby, domestic supply, has grown at weaker pace. Production data does support the ‘surplus’ story (see table). This is true across major crops; even in pulses where the post-2014 8% growth is not statistically significant relative to the 7.6% in the previous period. Even if we account for some imports, the supply conditions could not have turned into a glut. This throws the ‘surplus’ story out of the window. Enter demand.
What about demand?
How do we view the supply-side explanations and facts within the context of aggregate demand? Large drops in production that do not cause prices to rise can only mean a shift or slide down the demand schedule. Recall that it was not so long ago that food inflation had crossed double-digits, remaining elevated so. Inflation discourse then fixated upon India’s rapidly rising real incomes and consumption as the key drivers of food prices. Demand paced faster than food supplies year after year, manifest in unrelenting, high food inflation that ruled from 2008-09 right until 2013-14. Just four years ago. A paper by Rahul Anand, Naresh Kumar, and Volodymyr Tulin (Chapter 4, Taming India’s Inflation, IMF, 2016) examined Indian inflation from demand and supply aspects for the period. These results have an important bearing for the current situation: the study finds that the strong growth in real incomes from 2004 resulted in substantial demand-side pressures.
The pace of real personal consumption growth was not matched by the supply of key farm products. So growth in food prices outpaced that in non-food prices by about 3.5% from 2006-07. Their simulations of the period show that strong growth in real personal consumption with sluggish growth in food supply could continue to affect India’s inflation dynamics—if private consumption growth picks up to 7% and food supply growth response remained at its historical level (e.g. Col 5 averages), they calculate food inflation would likely exceed non-food inflation by 2.5–3 percentage points per year. But, real private consumption growth sustained at 7.4% and 7.3% in 2015-16 and 2016-17, moderating to 6.6% in 2017-18 as per the new GDP series. Two successive drought years in 2014-16 extracted a toll on agriculture growth and incomes.
The puzzler is: Food production growth rates are down by a factor of four in most crops over 2014-15 to 2017-18, but real private consumption growth races around 7%, and there is still no upward pressure on food prices? If we were to extend the results of Anand et al’s simulations to last four years, food prices would have been shooting up! But a classic demand-supply gap is playing out and yet, food prices crash all the way down! What is going on? How do we explain this conundrum? The suspicion is that the CSO is possibly, grossly overstating real private consumption growth. If not, the growth is extremely lopsided in favour of the urban segment or upper income deciles. It is the poor who have significantly larger marginal propensities to consume for food items. Add in rural wages’ growth, from where sprang the entire boost to food inflation in the past—these decelerated for four years beginning 2014, only started to improve in 2017 but reversed direction quickly and have, most recently, falling to a decadal low of ~3%. Sceptics may point to the robust FMCG sales, those of two-wheelers and tractors.
These indications perhaps need re-examination in the light of two concurrent developments: One, the possibility of credit fungibility cannot be dismissed given the extraordinary lending pace of NBFCs and housing finance companies for affordable housing where NPAs in the Rs 0.2 million sized loans are eliciting RBI’s concern, the fast-paced MUDRA loans and racier ‘other personal loans’ and ‘credit card outstandings’. Two, sustained weakness in labour-intensive segments, e.g., textiles, leather, gems & jewellery, and more generally, MSMEs, where there is mounting evidence of financial stress-buildup, prompting RBI to relax their NPA-recognition cycle to 180 days recently. Anecdotal evidence also underscores MSMEs’ distress: A Tamil Nadu state department survey tabled recently in the assembly reports thousands of small and medium industries in the state are facing closure, rendering thousands jobless because of various reasons, including imposition of GST—MSMEs reduced by 49,329 units, employment in the sector lowered by 5,19,075 persons during 2017-18.
Dun & Bradstreet’s assessment from its proprietary database (daily sales outstanding) shows MSMEs including export firms haven’t recovered from demonetisation and GST, which decreased sales volumes and increased borrowing costs. Thus, contrary evidence and past trends both point to weak demand pulling down farm prices, not excess supplies. Unfortunately, as macro aggregates go, we have only the current GDP series as guide. Historically, consumption estimates in the national accounts have been significantly biased upwards. NSSO surveys are probably closer to reality; when the next round occurs, it will hopefully throw more light to resolve this puzzle. Until then, speculation is the only course. That is a misfortune.