Finding a scapegoat for the inflation

In a rare interview given to the media, Prime Minister Modi mentioned, as one of the successes of his tenure, that inflation has been lower since 2014. It is indeed correct that inflation has been lower on average since, but three points need recognition in the context. First, inflation was already declining before 2014. And, secondly, India’s economy slowed after 2016, which could not but have contributed to lowering inflation. Finally, the decade since 2014 divides in two, with inflation declining in the first half and accelerating in the second. The sharpest  acceleration starts in 2019-20, which was before COVID-19 and the war in Ukraine. This points to the role of domestic factors in this inflationary episode.

A defining feature of the inflation we have witnessed since 2019 is the high inflation among food products. In the past five years this group of goods has contributed substantially to overall inflation, the direct contribution often exceeding 50 percent. The indirect contribution, working via industrial costs, would have been higher. That this has got the government worried is evident in a measure that it has brought in with effect from April 1. From this date on, till further notice, entities ranging from wholesale traders to retailers dealing in rice and wheat have to report their stock holding to the government on every Friday. It appears that in a fit of desperation, the government is veering away from its earlier commitment to repeal the Essential Commodities Act which imposed stock limits on traders. The point is that it is unlikely to make much of a difference to the current inflation.

It is a mistake to assume that traders in rice and wheat can cause inflation. Unlike in the case of goods such as gold or fossil fuels, these are perishable goods and traders run the risk of their degradation while holding them. Moreover there is an annual crop cycle, and the historical pattern in India has been that harvest season prices decline as the new crop comes in. This means that the trader has an incentive to not hold stock across the cropping year for fear of making a loss. In such a market, the price is largely set by fluctuations in the weather from year to year. Traders make a profit of course but are an unlikely source of inflation for they have no control over production. In agricultural markets, or what we may term the market for raw produce, prices are driven by the supply-demand imbalance.

What about the retail trade sector? The surge in inflation post-COVID in the US triggered an explanation in terms of the role of large food retailers in boosting prices. But US inflation has now declined substantially, suggesting that while pricing power enables the large food retailers to earn high profits it is altogether a different thing to say that they cause inflation, which is a continuing rise in prices. In the case of the US they were most likely passing on the rise in their costs due to the supply constraints that results from the lockdowns. In India, the likely role of food retailers is even less likely. The retail sector in India includes both the kirana store and the supermarket chains. As yet the market share of the latter is unlikely to be high. This is unlike what we would expect in the market for crude oil.          

For the reason elaborated upon, the government’s recent move on stock holding with respect to  rice and wheat can serve as no more than optics. Firstly, the group food products extend far beyond the cereals to pulses, wheat and milk, all of which have been subject to inflation. Presumably, action against grain traders is more visible. Secondly, we are witnessing here the impact of a deeper phenomenon and that is global warming related to climate change. Research demonstrating the impact of rising temperature on wheat yields in north India has been around for sometime now. Official estimates of production of wheat for the marketing year 2023-24 are unavailable at present but trade estimates suggest that output is the lowest in five years. There is speculation that the government may implement an export ban. This will ensure greater availability in the domestic market, cooling inflation. However, both the monitoring of private stocks, with a view to prevent an imagined speculation, and export bans do not address the central issue of inadequate supply. The usefulness of focusing on wheat is that we can see this clearly. However, wheat is only a small part of the food basket. Thus the high food inflation since 2019, implies that the production of agricultural products is not keeping up with the demand for them. Prognosis at the global level is that global warming will ensure rising food prices.

The scenario of rising food prices does not elicit much attention in India from analysts. It has not influenced economic policy much in the last decade. Agriculture has not been at its centre, and when it has been it has focused on issues such as marketing or stock holding limits as in the now repealed Farm Laws. There is  an ecological aspect to the rising food inflation of the past four years. This must be tackled head on, by addressing the problem of lowering of the water table, evaporation of soil moisture and depleting top, all of which directly lower yield and thus reduce agricultural output. The world does not have more land to grow crops.

In the midst of this high and persisting food inflation, which has the effect of leaving a very high proportion of the Indian population without access to a healthy diet, India is saddled with an inappropriate anti-inflation policy. Termed inflation targeting it is geared to lowering output growth to ostensibly cure inflation. It is easy to see how hopeless it is in the context of the current inflation in India which is due to a persistent supply shortfall of almost every agricultural product that we consume. We waste precious time hoping that it can produce a miracle that it is incapable of doing.