Signals and noise


The increase in the prices of food items is good news for farmers but not for end-consumers. But that’s not howit always has been. Pulses, for instance, saw 12% inflation over the past decade. Yet the farmer hardly benefitedand the end-consumer, too, was complaining.

 

The distress for pulses growers can be traced to stickiness in input prices compared with output prices, andextreme price volatility. This month’s theme takes a deep-dive into the price and production dynamics of pulses,which is a major source of protein in India.

 

In fiscal 2017, bumper production and a sharp decline in prices did bring relief to the consumer but not to thefarmer. That’s because input costs grew steadily, while output prices fell sharply, negating the benefit of higherproduction. Our analysis shows that falling prices had a detrimental effect on profitability of growers. Profitmargins for all pulses except gram fell an average 8% on-year in fiscal 2017.

 

Pulses follow what the economists refer to as the ‘cobweb phenomenon’, where output responds to prices with alag. Production decisions, taken on the basis of prices experienced in the preceding period, create a cyclicalpattern in pulses, which gets amplified by weather because these crops are largely rain-fed.The policy focus with regards to pulses, therefore, should not only be on improving production but also on pricesmootheningmeasures. Increasing irrigation coverage and development of markets are long-term remedies. Inthe near term, however, efforts should focus on effective use of price stabilisation fund and ironing out ofinefficiencies in the futures market.

 

Recent data releases do not spawn much confidence. Demonetisation and the Goods and Services Tax (GST) havetaken some bite off growth. The Reserve Bank of India’s (RBI) consumer and business confidence survey shows atamping down of expectations.

 

Industrial production growth, too, dipped to a four-year low of -0.1% in June and PMI signals for July formanufacturing as well as services are far from encouraging. While the adverse impact of demonetisation ongrowth has more or less faded, the short-term disruptive impact of GST is playing out. While a high-base effectwas partly to blame for the June dip in industrial production, much of the damage is expected to have come fromdestocking of goods ahead of the transition to the GST.

 

Consumer inflation in July spurted to 2.4% in July from 1.5% in June. The recent dip in inflation wascontemporaneous with demonetisation-led crimp in demand, low-base effect and a seasonal downside pressureson food, all of which are transitory. Inflation will rise further and we expect an average inflation of 4% in thecurrent fiscal, which would be well within the RBI’s target.