What is the issue?
The dichotomy in the consumption pattern in India calls for addressing the declining trend in food inflation to increase agricultural income.
How is the consumption pattern?
- Upper-end consumption appears steady.
- E.g. Growth in sales of cars and consumer durables is healthy.
- Also, airline traffic has been growing so rapidly, as an indication of the above trend.
- However, indicators of broad-based consumption are weak.
- Volume growth in consumer staples (soaps, shampoos, etc) remains weak.
- Indicators of consumption in India thus point to a two-speed economy.
How are food prices a reason for this?
- Relation - Nearly 45% of the workforce has primary employment in agriculture.
- So, roughly, about half of India is a net 'producer' of food and the other half is a net 'consumer' of food.
- Thus, food prices, in a way, mean transfers from the consumer to the producer.
- Effect - Conceptually, in this case, the consumers are taken to be the 'rich' and producers are taken to be the 'poor'.
- In this sense, inflation in food translates to increased transfers from the 'rich' to the 'poor' or the agricultural ecosystem in general.
- In other words, if food inflation drops, only a lesser amount gets transferred.
- Lesser transfers translate to being a driver of weak broad-based consumption among the population in primary employment.
- On the other hand, the portion not transferred/retained by the 'consumers' due to lower prices, takes the form of financial savings.
- This in turn is the reason for sustained growth in Upper-end consumption of the 'rich'.
- This partly explains the dichotomy existing in the consumption pattern in India.
- Past Trends - Since 1960, average annual growth in agricultural output (as measured by real GDP growth) has been 2.5%.
- And average annual price growth has been 7.5%.
- Despite the relative weak output growth, aggregate income in agriculture kept growing due to the rising prices.
- This was also an important reason for the growing number of workers in agriculture.
Why is the slowdown in food inflation?
- Food price inflation has slowed primarily due to over-supply.
- Improving agricultural productivity due to better access to roads, phones, electricity, and credit is increasing the supply.
- The fiscal discipline also has considerably helped in increased food supply.
- India does have one of the highest deficits in the world at present.
- However, deficits currently are the lowest in the last four decades.
What are the implications?
- It is not to be denied that sustained high food price growth had some serious side-effects for the economy.
- These include chronic inflation, high interest rates, and frequent spells of currency weakness.
- However, weak food price inflation as well has some worrying implications that India is currently witnessing.
- If half of the workforce has weak income growth, their consumption slows.
- E.g. they stop adding rooms to their houses or moving from kuchcha mud huts to pukka brick-and-cement houses.
- There is also no easy mechanism to route financial savings from the top half to support consumption of the bottom-half.
- Options to create jobs at a scale that provide alternative employment are also weak.
What is the way forward?
- Food price raise can engineer transfers and ensure funds flow through agricultural markets.
- But it is hard to engineer price increases in a commodity that is in oversupply.
- In this line, the recent Budget promised to set minimum support prices (MSPs) that guarantee a 50% margin to farmers.
- However, how effectively can MSP bring parity among different crops and ensure a benefitting price rise scenario is doubtful.
- Agricultural exports should be addressed as a sustainable and non-inflationary path.
- This can go a long way in improving agricultural and national incomes.
- Income growth would also create demand for manufactured goods that can stimulate the much awaited manufacturing revival.
- Food processing for domestic as well as export demand can also create employment opportunities.
- Re-skilling the tens of millions of farm workers, to take on non-agricultural jobs, also needs attention.
Source: Business Standard
