Why farm deflation is essentially a problem of liquidity

The main problem for farmers today is not production or having sufficient crop to sell. Instead, it has to do with prices that they are getting for their produce.

Written by Harish Damodaran | New Delhi | Updated: April 19, 2018 7:46:41 am
Why farm deflation is essentially a problem of liquidity In majority of crops, inflation has been negative this year. (Express Photo)

The Met Department has forecast a third-in-a-row “normal” south-west monsoon this year, thanks to the very low probability of an El Nino event — the abnormal warming of the equatorial eastern Pacific Ocean waters, which is known to adversely impact rainfall in India during the season from June to September.

However, as the experience of the last two years shows, a good monsoon is only a necessary, but not sufficient condition for farmers’ prosperity. The main problem for farmers today is not production or having sufficient crop to sell. Instead, it has to do with prices that they are getting for their produce.

The accompanying table shows the annual price increase in key agricultural commodities for the latest month of March and also the corresponding average figure for the 2017-18 financial year as a whole. Since the inflation rates here are based on the official wholesale price index, they are a reasonable proxy for the extent of raise or decline in farmer realisations at the mandis.

It can be seen that in a majority of crops, inflation has been negative, with prices actually falling year-on-year. The incidence of deflation has been particularly pronounced in pulses and oilseeds, but also recorded for wheat, condiments and spices, and natural rubber. In most other crops — be it paddy, milk, egg and meat, cotton or sugar — the price increases are at very low single-digits.

The only exception has been fruits and vegetables, though even in their case, the inflation is mainly on account of a low base. Potato, for instance, is selling in Uttar Pradesh’s Agra mandi at around Rs 10 per kg, which is just about remunerative for the farmer. Last year, at this time, the tuber was fetching a mere Rs 3.7-3.8/kg. On the other hand, the average modal price of onion at Lasalgaon (Maharashtra) has crashed from Rs 15.50 to Rs 6.25 per kg in the last two months, while tomato is currently trading at Rs 4.50/kg in Kolar (Karnataka). This, in peak summer, when vegetable prices are expected to generally firm up!

The above across-the-board price declines in agri-commodities defies ordinary explanation. Many ground reports, including from this newspaper, suggest that a major cause could be the demonetisation-induced liquidity crunch in rural areas. Much of produce trading takes place in cash, simply because that is the farmers’ preferred medium of payment.

Farmers normally bring their crop to commission agents in mandis. These middlemen not only help farmers connect to traders/buyers, but also ensure payment in hard cash for the produce that is sold by them. The commission agents themselves may be paid through cheque or electronic transfer by the traders taking delivery, but the payment to farmers is mostly in cash. There is anecdotal evidence to show that the supply of currency to rural areas has not fully normalised even almost one-and-a-half years since the scrapping of the old Rs 500 and Rs 1,000 denomination notes. While the shortage has been obvious in recent weeks, whether the availability of currency was adequate even prior to that – more so, given the bumper crops harvested and brought to the mandis by farmers in recent seasons – is something which needs probing.

It is a simple rule of economics that when there’s too much money chasing too few goods, the result is inflation. That rule is now, perhaps, working in the reverse. When the mandis are devoid of liquidity and farmers want to be paid in cash for their higher output from normal monsoons, they are bound to receive lower prices. The current crisis in farms may be a more a crisis of liquidity.

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