It was in Nov/Dec 2018 that prices of onions had crashed. Prices had come down to such a low level that at many places farmers were forced to throw onions on the streets. Reports of onion farmers getting a price of less than Rs 2 a kilo adorned the local newspapers. Some weary farmers had even acknowledged receiving a price as low as 30 to 50 paise per kg.
While farmers suffered, consumers were visibly happy. And so were the mainline economists, after all food price inflation had come down to an 18 month low. Consumer food price index had come down to minus (-) 2.65 per cent, pulling down the consumer price index to 2.11 per cent.
Strangely there was no hysterical media drawing the nation’s attention to farmer’s plight. Nor did I see any mainline economist, including those with the credit rating agencies and private sector banks raise concern over the declining farm incomes. This was also at a time when Niti Aayog had acknowledged that real farm income growth was ‘near zero’ continuously for two years. In another study, Niti Aayog had found that in five years to 2015-16, real farm incomes had grown by less than half a per cent every year, 0.44 per cent to be exact. Even this had failed to evoke a policy response from the Monetary Policy Committee of RBI which remains obsessed with keeping inflation low. In the process what happens to the livelihoods of millions of farmers and farm workers is not its concern.
A year later in Dec 2019, when consumer price index climbed to 7.35 per cent, essentially with retail food prices soaring to 14.12 per cent, driven mainly by price rise in onions and to a lesser extent in tomato, pulses, meat and milk, the media as expected went hysterical. The same media which conspicuously kept quiet last year when farmers were severely hit with low prices, is now questioning how the poor will be able to afford vegetables at such high prices. Economists, including those with brokering agencies, are debating whether higher food inflation at a time when the economy is expected to expand only by 5 per cent will lead to stagflation. With inflation going beyond the monetary policy band of 6 per cent (4 per cent, plus and minus 2 percent) and fiscal deficit getting out of control, some economists are even calling for a review of the monetary policy questioning whether it is capable of tackling inflation.
How the monetary policy can control rise in prices caused by supply-side constraints remains a puzzle. Agriculture Minister Narendra Singh Tomar told Lok Sabha that a shortfall in onion production by over 15.8 lakh tonnes has led to the spike in onion prices. This was primarily because of unseasonal rains, which lashed parts of southern and central India after the period when monsoon rains normally withdraw, in the month of September. Nearly 64-lakh hectares area was affected by incessant rains, which extended to early November, causing damage to the standing crops. Much of the rain damage was in Maharashtra and Karnataka which produce nearly 50 per cent of the onion output. While Maharashtra received 1.5 times the average rainfall, untimely rains hit 45 per cent of the area under onion production in Karnataka.
Higher food prices, especially that of onion had also raised the wholesale price index (WPI) to a 7-month high of 2.59 per cent in Dec. But whether the benefit of a higher wholesale price went to farmers was perhaps best reflected by a video of a crying farmer from Ahmednagar in Maharashtra, which went viral on social media, who was able to sell onions for only Rs 8 per kg. At a time when onion prices were ruling at a high of Rs 100 per kg, this farmer said he had employed extra labour to pull out the crop during heavy rains and what he got in return was peanuts. This is generally the story of farmers everywhere.
The benefit of high prices that consumers have to pay rarely percolates down to the farmers. In case of onions, traders purchase the crop when prices are low, store them in godowns, and release it into market when prices are favourable. It is known that a strong cartel of middlemen operates in case of onion trade, a nexus that successive governments have failed to break. Nevertheless, several studies have shown how a battery of middlemen and traders walk away with bulk of the food price rise gains. Market prices of pulses last year for instance had on an average prevailed at 10 to 25 per cent lower than the MSP announced. Tomato, onion and potato are the three major vegetable crops that have been hit time and again by volatility of markets. It is primarily because of low price realisation by farmers that the demand of increasing and extending Minimum Support Price (MSP) to all crops remains steadfast. Even if the MSP does not cover the cost of production that farmers incur at least it provides them an assured price.
If only there was an improvement in supply chain management, which can ensure a higher proportion of the consumer price flowing to the farmers, there is certainly a scope for boosting rural incomes. However, what we are seeing is that when food prices increase, the consumer pays a much higher price without an accompanying increase in farmers’ income. Unless middlemen’s share in the food chain gets minimised or eliminated, there is little hope for farm incomes to increase. #
Understanding food price inflation. Network18.com. Jan 17, 2020
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