Himanshu: Low inflation masks a growing problem of fruitless farming

Mint

24-07-2025

The latest inflation estimates based on the consumer price index (CPI) and wholesale price index (WPI) have brought cheer to policymakers and financial markets. For June, retail inflation, as measured by the CPI, was recorded at 2.1% on a year-on-year basis.
Rural inflation was even lower, at 1.72%, while it was 2.56% in urban areas. These are India's lowest readings since January 2019, when the economy was in a slowdown. Wholesale inflation, in fact, turned negative, with prices down 0.13% in June from a year earlier.
While inflation at a six-year low is good news for the central bank and policymakers who have struggled to bring it down, the composition of our inflationary trends across commodities and their groups should be a worry for India's economy.
At both the retail and wholesale levels, the decline in inflation was driven largely by food prices. In the retail case, food inflation has turned negative, with prices declining 1.1% from a year earlier (rural food inflation was at -0.9% and urban at -1.2%).
A better picture emerges from WPI data, which shows food inflation at -3.8%. Unlike retail, wholesale inflation has seen a sharp decline since December 2024, when it was 8.5%. The reading has declined steadily since.
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Prices have moderated for almost all items within the food group at the retail level. But in the case of vegetables and pulses, they have declined sharply by 19% and 12%, respectively. Meat and fish items saw a decline of 1.6%. The wholesale price drops are sharper.
While the decline in food prices both at the retail and wholesale levels may have driven headline inflation down, it has hurt price realization for farmers and thus the profitability of farming.
So much so that for major pulses, farmers are forced to sell their produce at prices much below Minimum Support Prices (MSPs) set by the government for not just this year, but also the last. This is also true for some other crops such as of soybean, which has seen prices collapse.
Part of the reason for price deflation is good monsoon rainfall, which has increased production. But this increase wasn't large enough to cause a collapse in prices on its own. It was exacerbated by the government's exuberance in importing pulses, most of them at prices lower than the MSP.
India imported about 7.3 million tonnes of pulses last year and 4.7 million tonnes in 2023-24 as against average annual imports of 2.6 million tonnes between 2018 and 2023. India will continue to allow the duty-free import of several pulses until March 2026, despite the collapse in domestic prices.
Similar is the case with several other commodities where ad-hoc trade decisions have driven down price realization for farmers. A reduction in duties on edible oils such as soybean, palm and sunflower oil has weighed on their local prices.
An unfortunate consequence of the lower farm-gate prices has been lower sowing for most of pulses and soybean this season, regardless of abundant rainfall.
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Meanwhile, core inflation (which excludes food and fuel) continues to reign high in India. This points to a shift in the terms of trade against agriculture vis-à-vis other sectors. Recent data also suggests that agricultural input prices have continued to rise sharply.
Also, a relevant negative consequence of the current global trade uncertainty has been a fall in fertilizer availability, which has pushed up black-market prices and dragged down usage.
A shift in the terms of trade against agriculture has combined with a relentless rise in input costs, some of it on account of supply shocks, to erode the profitability of agriculture even further.
With India's rural economy already facing stagnant real wages and a decline in farm incomes, mass distress is likely to intensify now.
Ad-hoc trade policy shifts are not aberrative or one-off missteps, but a reflection of a larger political economy paradigm that prioritizes reducing retail inflation even if it results in farm incomes going down.
It is part of a political economy architecture that favours the urban middle class against the country's large and vulnerable rural population.
Given this context, any sacrifice by the government of the agricultural sector's interests to secure a favourable trade deal with the US for India's non-farm sectors would only reinforce our distorted political economy under which agriculture gets short shrift.
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True, low inflation makes space for interest rate cuts, but these will not trigger industrial investment so long as consumer demand stays weak. A policy paradigm that ignores this reality goes against the principle of equity. It also hurt incomes and the larger economy.