Farmers May be Paying the Price for an Inflation-Targeting Regime

Context:  Institutional and political motivation to keep retail prices low have hurt farmers’ incomes and resulted in farm distress

Concerns about India’s Economy:

• Sharp contraction in national income.

• Upward trend in inflation :

• In June and July, overall inflation stood at 6.23% and 6.93%, respectively, with rural inflation marginally higher than urban inflation.
• These are beyond the upper bound of 6% set by the monetary policy framework of RBI.

Concerns with marketing of agricultural produce:

• Reserve Bank of India’s (RBI’s) failure to control inflation: Increase in the CPI is a trend that prevailed before the lockdown, averaging around 6.7% in January-March 2020, and remains high despite RBI’s interventions.

• CPI inflation appears to be largely a result of supply chain disruptions caused by a stringent lockdown.
• This has falsified the premise that inflation depends on Monetary Policy Committee (MPC) actions. 

• Political Economy of Inflation Targeting: Large weight age for food items in CPI: 

• Thus effective strategy of inflation containment seeks to keep food prices low. This is achieved by keeping  farm-gate prices low
• It penalize the agricultural sector by leading to a reduction in subsidies and a decline in investment, both of which contribute to raising input costs.

• Mismatch between farmgate and retail inflation: While the CPI is increasing, the Wholesale Price Index (WPI) shows a declining trend. – from 6% in the Jan-Mar to 2.4% in July.

• With farm input costs rising faster than output prices, the net result has been a turn in the terms of trade against agriculture.
• Since a majority of agricultural items, including cash crops such as cotton, have shown negative WPI inflation, the earnings of farmers must have been worsening.

Conclusion: Thus the real cost of inflation-targeting is therefore borne by farmers, who are deprived of remunerative prices only to satisfy credit rating agencies and benefit the financial sector.