New Delhi: The spill-over impact of the disturbances, which agricultural sector is facing, may not just be limited to the farm sector alone. Historically, the shortfall in production due to weather-related vagaries have resulted in flaring up of food inflation and generalised inflation. In 2009, the shortfall in precipitation resulted in inflation shooting up over 10 per cent due to rise in food inflation. Food inflation has increased again to 6.8 per cent in February 2015 on the back of higher vegetable inflation.
So will the food inflation shoot up again? Or is the fear overstated In my view the answer lies in the nature and the extent of government response to the rising distress in the farm sector. There are contrasting examples in history.
During 2000-2003, farm produce declined due to poor rainfall. But both the CPI and WPI inflation averaged around three per cent. It was because of the then government had responded by running down food grain buffer, announcing modest hike in MSPs, higher allocations through PDS and less aggressive procurement. In 2009, the government had responded to a drought-like situation by aggressive procurement, resulting in food grain buffer, hiking MSP for cereals. In addition, the government’s fiscal stimulus and rising global commodity prices had amplified the inflationary impact.
Now supportive policy interventions have been flagged and global prices have been softening. In my view, the farm sector is witnessing declining cash flows, which is not inflationary. The general fear is that the crop damage due to unseasonal rains will result in flaring up of food inflation is not a necessary outcome.
Evidently, the decline in food grain production due to failed monsoon last year did not help to increase income for the farmers. In the context of declining support from the government, it is unlikely that domestic farmers have significant change of better income flows due to rising prices. So if the present policy stance is maintained, it is likely that supply side will overweigh and inflation remains modest despite loss in production of agricultural produce. Conversely, if it offers large farm loan waiver or other interventions, it may unsettle a stable inflation.
Clearly, the uncertainty for the RBI has elevated substantially. Hence, in my view RBI will not be in a hurry to ease policy rates in the near future.
