There is very little that the Reserve Bank of India (RBI) can do to control onion or tomato prices.
That’s why many central banks – the US Federal Reserve, for example – target not general, but ‘core’ inflation, which excludes the rate of increase in prices of food and fuel items. Fluctuations in the latter are largely caused by supply-side shocks – positive or negative – that are non-monetary in nature. Monetary tightening and high interest rates can only control ‘core’ inflation, by discouraging businesses from borrowing to finance investments and encouraging households to save rather than spent. In other words, reducing aggregate demand in the economy, so as to bring it roughly in balance with the supply of goods and services.
The RBI, on the other hand, targets general or ‘headline’ inflation based on the consumer price index (CPI), in which food and non-alcoholic beverages have a combined 45.86 per cent weight. A monetary policy framework agreement, entered into with the Finance Ministry on February 20, 2015, commits it to achieving an annual CPI inflation target of 4 per cent with an upward tolerance level of 6 per cent. Meeting this – when almost 46 per cent of the index on which it is based, comprises agricultural products whose prices are not amenable to control through traditional monetary policy instruments – is obviously a tall order. The success of inflation targeting, thus, rests on control over ‘non-core’ inflation, which can only be through non-monetary means. And this is more so for India, where the relative importance of food in its CPI is higher than the corresponding indices of many countries (see charts).
Non-monetary means to control food inflation has, of course, involved measures that the RBI euphemistically calls ‘supply-side management’. One of first steps taken by the Narendra Modi government – on July 2, 2014 – was to bring onions and potatoes under the Essential Commodities Act (ECA) after nearly a decade. This move, allowing state governments to impose stockholding limits in order to act against supposed hoarders and black-marketers, was combined with imposition of minimum export price (MEP) restrictions.
Between June 2014 and August 2015, the MEP on onions – below which no exports are allowed, forcing farmers to sell more for the domestic market – was raised from $ 300 to $ 700 per tonne. That was a period when prices were consistently ruling at over Rs 1,500 per quintal in Maharashtra’s Lasalgaon market, scaling Rs 4,000-4,500 levels in August-September 2015. The MEP was removed on December 24, 2015 – but by which time, the rates had crashed to Rs 1,000-1,100.
In potatoes, too, an MEP of $ 450 per tonne was fixed in July 2014, when the tuber was trading at Rs 1,500-1,600 per quintal in Agra, while crossing Rs 2,200 by early November. The MEP was taken off on February 20, 2015, but prices had already fallen by then to Rs 550 on the back of a bumper crop, and plunged further to Rs 300/quintal in April. It led to farmers planting less the following season and rates climbing again from around June 2016. On July 26, the MEP was back — at an even lower level of $ 360 per tonne – before being scrapped on December 28. One can see from these a clear pattern.
First, the slightest price increase in any farm produce invariably tends to call forth government ‘supply-side management’ actions violating every rule of free trade. We have witnessed this most recently in onions, where prices at Lasalgaon hovered well below Rs 1,000 per quintal for virtually the whole of 2016 and right until July this year. The government, predictably, did nothing about that, but the moment prices began firming up this August, it went on an overdrive. On August 25, the Union Food Ministry issued an order, enabling states to impose stock limits and take action against those “engaged in speculative trading, hoarding and profiteering in onions”. And in a first-of-its-kind move, income tax raids were conducted on traders in Nashik last week – to unearth not undeclared money, but presumably hoarded onions!
Secondly, the alacrity in imposing controls – even in the so-called era of liberalisation – has been matched by complete lack of urgency in withdrawing them. The best example here is of pulses. In 2015-16, as prices surged to unprecedented peaks, the Modi government did not stop simply at banning exports, allowing duty-free imports, and extending stock limits applicable to ordinary traders under ECA to even dal millers and importers. Enforcement agencies, including the Directorate of Revenue Intelligence and the Intelligence Bureau, were also made a part of the Centre’s “coordinated action”.
But in 2016-17, India’s pulses production hit an all-time-high of 22.4 million tonnes (mt), which came alongside record imports of 6.61 mt. That farmers were set to harvest a bumper crop was known since late-2016, when ruling market rates had already plunged below minimum support price levels. Yet, stockholding limits on both raw pulses and milled dal were lifted only on May 17, this year. On August 5, imports of arhar (pigeon-pea) were brought under the restricted list, which was followed by imposition of similar quantitative caps for urad (black gram) and moong (green gram) on August 21. On September 15, the Modi government also freed exports of arhar, urad and moong dal, which should have happened at least nine months earlier.
It’s not difficult to link the above non-monetary means of controlling food prices to the RBI’s inflation targeting policy. Since repo rate hikes are ineffective against ‘non-core’ inflation, the onus for addressing the 46 per cent CPI component lies with the government. And it inherently incentivises policy actions favouring controls at the slightest hint of price rise in farm goods — and passivity when produce realisations hit rock-bottom.