[Editorial Analysis] Negative signals: on falling inflation rates

Mains Paper 3: Economy

Prelims level: Inflation

Mains level: Negative inflation rates and it s impacts on economy

Context

• Retail inflation dropped to a 17-month low of 2.33% in November, as compared to 3.31% in October, primarily due to the fall in the prices of various essential food items.

• Food prices fell by a huge 6.96 percentage points compared to a year ago and, at minus 2.61%, are now in deflationary territory for the second successive month.

• The fall in inflation is obviously good news for consumers, particularly those in urban India who are happy to pay less for their purchases; also for the Reserve Bank of India, which will now have more room for manoeuvre in the matter of interest rates.

Analysing the agricultural distress

• The producers of basic food items who are located in the distress-affected rural parts of the country, with falling farm incomes also impacting landless labour and rural demand.

• At the heart of this problem is the unpredictability of farm prices, which are known to exhibit extreme levels of volatility owing to various supply-side issues that plague the agricultural sector.

• Though farmer producer companies have stepped in with help and guidance to farmers to use hedging tools to minimise price risks, they are too few and far between to make a difference.

• Finally commanded impressive prices in the retail market, the cartelised agricultural marketing system has made sure that farmers received little to nothing.

Way forward

• Ahead of the general election next year, State governments across the country are likely to resort to short-term relief measures such as farm loan waivers to temporarily relieve farmers of their deep distress.

• There will also be pressure to announce higher minimum support prices for various agricultural goods.

• It is another matter that no government has ever had the wherewithal to deliver on such lofty promises.

• The poor implementation of MSPs is one of the reasons for farmers taking to the streets in protest.

• The Centre may prod the new RBI Governor to adopt a more dovish monetary policy stance in the run-up to the election citing falling inflation figures.

• But none of these measures will help farmers, who have increasingly taken the protest route of late to make their demands heard, in any meaningful manner in the long run.

• Real agricultural reform is crucial to enable farmers to freely make their own business decisions without the grabbing hand of the government.

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