Food Inflation and Consumption Pattern

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