The Narendra Modi government’s first term (June 2014 to May 2019) was marked by benign consumer food price inflation. At a mere 3.3% year-on-year, it averaged below even the 4.3% for overall retail inflation. Politically, the ruling party benefited, given that there are far more consumers of milk in India than dairy farmers. The same goes for the number of consumers of sugar, pulses, potatoes and onion vis-à-vis those growing sugarcane, chana, moong and vegetables. It pays to keep food prices low, at least in the short run.
But low farm produce inflation — the average annual increase in the wholesale price index (WPI) for food articles was 2.9% during 2014-15 to 2018-19, while 0.8% for non-food agricultural articles — has also hurt incomes in rural areas. That has proved not so beneficial for the economy in the long run, with the effects being seen in the sales of tractors and agro-inputs as well as two-wheelers, consumer durables and FMCG products.
To understand the link between consumer prices and farm incomes, take the example of sugar. For an average household consuming 5 kg of the sweetener per month, a Rs 5/kg price increase works out to an extra outgo of Rs 25 or Rs 300 for a full year. But for a one-hectare farmer harvesting 80 tonnes of cane, which yields 8.8 tonnes of sugar at 11% recovery, the same Rs 5/kg rise translates into an additional income of Rs 33,000 (assuming mills pass on 75% of the Rs 44,000 higher sales revenue, as per the Rangarajan Committee’s formula). Uttar Pradesh alone has some 25 lakh sugarcane growers. The impact on consumer spending, from each of these families earning Rs 2,750 more per month, wouldn’t be small. Nor will be a Rs 5/litre higher procurement price for milk to the Gujarat dairy farmer pouring, say, 10
litres daily to a village cooperative affiliated to Amul.
The turnaround in farm prices is, perhaps, the only good piece of news in an otherwise dismal environment for the Indian economy today. It’s not only onion that is currently wholesaling at Rs 2,500-2,600 per quintal in Maharashtra’s Lasalgaon market, compared to below Rs 500 a year ago. So is potato at Agra (Rs 1,200 versus Rs 600/quintal), soyabean (Rs 4,150 versus Rs 3,800) at Latur or groundnut in Rajkot (see accompanying story). Farmers are also getting decent prices for maize, cotton and most pulses. Maharashtra dairies are now paying Rs 32-33 for a litre of cow milk with 3.5% fat and 8.5% solids-not-fat content, which is roughly Rs 9-10 more than last year. Even ex-factory prices of sugar, the commodity most susceptible to bearish pressures until recently, have moved up from Rs 31 to Rs 33 per kg.
The above trend is also reflected in annual retail food inflation soaring during the Modi government’s second term, from 1.8% in June 2019 to 14.1% in December 2019. During the same period, the WPI inflation in food articles has also climbed from 7.3% to 13.2% and from 5.1% to 7.7% for non-food agricultural articles.
Some of this increase could be simply weather-induced. Lack of rains in the first half of the monsoon season (June-September), coupled with too much of it from September right till mid-November, resulted in reduced or delayed sowing of kharif crops along with damage during the late-maturity and harvesting stages. This has been most obvious in the case of onions, where the kharif and late-kharif crops have taken a huge hit.
But the same heavy and unseasonal rains have led to a 9.5% increase in plantings of the rabi (winter-spring) crops. The availability of good soil and sub-soil moisture, irrigation water from reservoirs filled to near full capacity, and a normal winter so far raises hopes of a bountiful harvest after March. Onion prices have already eased in anticipation of that, after having scaled Rs 10,000/quintal levels at Lasalgaon in December.
This is where the Union Budget can make a difference — at a time when price sentiment in agri-commodities has improved (the fall seen in both domestic and global markets following the coronavirus outbreak in China could be a temporary aberration) and a bumper rabi crop is set to arrive in the mandis.
There’s no better time than now for Finance Minister Nirmala Sitharaman to make a simple announcement of intent in her budget speech: Scrapping all provisions in the Essential Commodities Act and state-level Agricultural Produce Market Committee laws pertaining to restrictions on domestic sale, stocking, movement and export of farm commodities. An explicit legislative commitment, that there shall be no ban on exports of onion, potato, pulses, sugar or other produce and no limits on how much stocks a trader/processor can hold at a given time, will help consolidate already improving sentiment. It will also bring the much-needed investments in agro-processing, warehousing and cold storage supply chains.
It is agriculture that holds the key to an economic recovery. And the stimulus in this case will have little fiscal implications.
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