A lot of analyst commentary on the latest quarterly GDP numbers for India has focused on the low growth in “nominal” terms: Gross value added (GVA) at current prices grew by just 6.3% year-on-year in July-September and 7.1% for April-September. If this first-half trend holds for the rest of 2019-20, it would be the lowest growth since the 6.2% recorded way back in 1975-76.
GVA is basically the value of output of goods and services, less the cost of all inputs and raw material used in their production. Growth in “real” GVA, which is at constant prices, is a measure of how much net output has increased. Nominal GVA growth, on the other hand, shows how much current net income has gone up. For producers, “income” is what matters more than “output”.
It is interesting in this context to note that nominal GVA growth for agriculture — a rough proxy for the “take home” of farmers — was a mere 7% in 2017-18 and 4% in 2018-19. For the five years of the Narendra Modi government (2014-15 to 2018-19), it has averaged 7.6 %, as against 13.5% during the previous 10 years of the United Progressive Alliance (UPA) regime. However, this difference isn’t due to “real” growth — the average of 2.9% for the Modi period was marginally below the 3.7% during UPA — as much as inflation. Growth in farm “incomes” has slowed down from 13.5% to 7.6% a year mainly because agricultural commodity prices haven’t risen significantly in the last five years.
This is where recent data holds out some hope.
Chart 1 plots year-on-year inflation based on the GDP/GVA price deflator, which is used to arrive at nominal national income estimates. It can be seen that agricultural inflation ruled consistently lower than general inflation from January-March 2017 to October-December 2018, while even negative in a few quarters. But since January-March 2019, the increase in farm prices has outpaced overall GVA inflation, in line with the previous trend from April-June 2014 to October-December 2016. In other words, the near-deflationary period for agriculture, clearly noticeable in the aftermath of the Modi government’s November 2016 demonetisation decision, seems behind us. Farm produce prices rose 5.2% year-on-year in the last July-September 2019 quarter, higher than the 1.9% general GVA inflation.
The above recovery in agri-commodity prices is also borne out by consumer price index (CPI) inflation data. Chart 2 shows consumer food inflation trailing general CPI inflation for 36 months in a row, from September 2016 to August 2019. That extended period of low food price increase — an average of 1.4% year-on-year, unprecedented in India — has since ended. For October 2019, CPI food inflation stood at 7.9%, compared to the overall retail inflation of 4.6%.
There can be two reasons for agriculture prices looking up or at least bottoming out.
The first is partly statistical: What goes down has to ultimately come up. But a related, more pertinent, point has to do with the productivity effects of sustained low farm realisations. In the case of milk, it would typically result in producers reducing herd sizes and even underfeeding their animals, especially calves and pregnant/non-lactating females. That is, at some point, bound to impact supply.
There is evidence of it already happening. In 2017-18, average milk procurement by cooperatives shot up by 10.8%. This was largely courtesy a crash in skimmed milk powder (SMP) and butter fat prices, which led private dairies to cut purchases and also pay less to farmers. In 2018-19, cooperative milk procurement growth, too, fell to 4.7%. In the current fiscal, most cooperatives as well as private dairies have reported negative procurement so far. Another indicator of supply tightness is prices: Current SMP rates, at around Rs 300 per kg, are double the Rs 140 levels for this time last year. Dairies in Maharashtra are also procuring cow milk with 3.5% fat and 8.5% solids-not-fat content today at Rs 30-31 per litre, whereas they were paying hardly Rs 22-23 a year ago.
The second reason is weather. The current year has been unusual: Rainfall during the southwest monsoon season (June-September) was deficient in almost two-thirds of the country till the last week of July. However, every month after that, including October and November, has registered surplus precipitation. This combination — of early-season drought and prolonged unseasonal rains — has led to a decline in kharif sowing area, along with damage to the standing crop close to or due for harvesting. Its most obvious casualty has been onion, whose production has taken a hit and prices, too, have gone through the roof (see accompanying story). And it isn’t onions alone: Prices of most kharif pulses — be it arhar (pigeon-pea), urad (black gram) or moong (green gram) — and soyabean are also now trading much higher relative to last year. So is maize, a key grain used in cattle and poultry feed.
The ongoing farm price recovery — it is actually a correction — should be good news at a time when the rest of the economy is wearing a sombre mood. What makes it even better is the likelihood of a bumper rabi harvest. The excess late rains may not have helped the kharif crop, but the best monsoon in 25 years has substantially recharged the groundwater table and aquifers. Besides, it has ensured that water levels in 120 major reservoirs are now filled to 86.3% of their full capacities, more than the corresponding 61% for last year and last 10-years’ average storage of 64.4% for this time.
One sign of the prospects for the rabi crop is fertiliser sales. These were down 3.3% in kharif — 270.94 lakh tonnes (lt) during April-September 2019 versus 280.17 during April-September 2018. The first two months of this rabi, though, has witnessed a 6.6% growth: from 111.63 lt to 119.01 lt. It suggests farmers’ keenness to plant; favourable soil moisture conditions and improved price sentiment should be reason enough for that. Even in milk, the supply situation should ease with enhanced fodder availability and production by animals going up during the winter “flush” season just about to start. When prices are good, farmers are also more inclined to invest in animal nutrition, health and productivity.
The one thing that can stymie the recovery process underway is kneejerk policy reaction to temporary shortage-induced price increases. We’ve already seen this in onions, with every conceivable weapon — from export ban and stockholding restrictions to income tax raids on traders — being deployed to cool down prices. In the coming weeks, there could be pressure to impose similar “supply management measures”, including slashing of import duties, on milk powder or pulses. It is, perhaps, as much in the interest of farmers as the overall economy for the government and the Reserve Bank of India to look through food inflation — at least for now.