On Friday, the Reserve Bank of India (RBI) governor Shaktikanta Das said that future interest rate reductions will depend on “incoming data”. This came just a day after his statement that the current consumer price index (CPI) inflation levels allow enough “room” for continued monetary easing. While policy rate reductions, beyond the 110 basis points already effected this year, will certainly add to the feel-good from the finance minister’s slashing of corporate taxes, a note of caution is in order. If overall retail inflation from September 2016 to August 2019 has averaged only 3.50 per cent, the credit goes mainly to food items, which have a 45.86 per cent in the CPI. Average consumer food inflation has been even lower, at 1.38 per cent, over this 36-month period. If CPI inflation has to remain within the RBI’s target of 4 per cent, it would obviously hinge upon sustained low food prices.
This is where the temptation to engage in “supply management” to contain food inflation at any cost, should be avoided. Unfortunately, the beginnings of that are evident. On September 13, the commerce ministry imposed a minimum export price of $850 per tonne on onions. Also, the state-run MMTC Ltd has been asked to import the bulb in order to control retail prices, which have crossed Rs 50/kg in major metros. These moves have angered onion growers, who say that the government showed no such enthusiasm when prices ruled consistently low for much of the last three years. They have a point. Suppressing food prices through artificial means is surely not the way to meet the RBI’s inflation target. Between December 2018 and August 2019, annual wholesale price inflation for food articles has moved up from minus 0.42 per cent to 7.67 per cent. While retail food inflation in August was still only 2.99 per cent, it has to eventually catch up with the trend in wholesale prices. This, if anything, should be viewed as a much-needed price correction.
The supply disruptions and possible crop loss from excess monsoon rains — 15.3 per cent in August and 31.8 per cent so far this month — could well lead to some hardening of prices in the coming weeks. Onion apart, we are seeing this in pulses, maize, jowar and soyabean as well. But in all these cases, prices are only recovering from lows. Also, arhar and moong rates, while ruling higher than last year, are still trading below their official minimum support prices. The worst thing the government can do now is to invoke the Essential Commodities Act or ban exports alongside permitting duty-free imports. Boosting farm incomes is more likely to guarantee an economic recovery than slashing of interest rates. The current slowdown, remember, began with Bharat. It should end with Bharat.