Executive summary

That prices of pulses are highly erratic is common knowledge. What is not commonly known, however, is that thereis a method to this madness.

CRISIL has observed that inflation in pulses, as measured by the wholesale price index (WPI), follows a cyclicalpattern, with prices shooting up every 2-3 years. Between fiscal 2006 and so far in fiscal 2018, there have been asmany as four such cycles. The trend rate of inflation has averaged 12.2%, with the peaks 40% above the zero leveland the troughs 25% below it.

The latest cycle, which began in fiscal 2013, has been a little different from the earlier cycles. Not only has it witnessedthe steepest peak (49% in November 2015) and fall (-32.6% in July 2017), but also, it has seen broad-based (acrosspulses) price fluctuations compared with the previous cycles where inflation was driven by individual categories ofpulses.

What gives? A closer look at the pulses inflation data throws up two broad themes:

First, upon decomposing the data for the past 12 years, we observe that gram (chickpeas) and tur/arhar (pigeonpeas) have experienced high price volatility and dominated the cyclical price movements in pulses in the past 6 years,compared with urad, moong and masur. Further, de-seasonalising and de-trending the data shows that while almostall pulses are prone to seasonal price cycles, these are more pronounced in the case of gram and urad (prices beginto dip in June and pick up in October).

Second, there is a cobweb phenomenon at play, wherein production responds to prices with a lag, causing a recurringcycle of rise and fall in output and prices. Upon analysing the correlation between production and one-year laggedWPI inflation data for the past 12 years, we find that the price cycles have been generally triggered by positive (excessproduction) and negative (under production) supply shocks. This has to do with the fact that farmers base their sowingdecisions on the prices observed in the previous period, and accordingly over- or under-produce the crops, triggeringa price cyclicality.