Everyone knows that food prices are the reason for consumer price index (CPI) inflation ruling so low and allowing the Reserve Bank of India (RBI) to not only soften its monetary policy stance from “calibrated tightening” to “neutral”, but even cut benchmark interest rates on February 7.
The latest CPI numbers for January 2019 show the overall year-on-year retail inflation rate at 2.05 per cent, the lowest in 19 months. Even lower, though, has been the consumer food price index (CFPI) inflation, at minus 2.17 per cent. Indeed, if one were to exclude the CFPI, which has a 39.06 per cent weight in the CPI, the “core” non-food inflation works out to roughly 4.8 per cent. That is more than the RBI’s own comfort level of 4 per cent.
The significant part, however, is not as much about CFPI inflation ruling below CPI inflation, as the fact of it being so now for 29 months in a row. The accompanying charts plot the year-on-year “general” CPI and “food” CFPI inflation rates for two 29-month periods. The first one is from April 2014 to August 2016 and the second one from September 2016 to January 2019.
It can be seen that for the first period, retail food inflation stood below general CPI inflation in only six out of the 29 months – namely November 2014, December 2014, May 2015, July 2015, August 2015 and September 2015. But in the second period, there has not been a single month where consumer food inflation has exceeded general CPI inflation. And equally remarkable is the fact that in as many as seven out of these 29 months — May 2017 to July 2017 and October 2018 to January 2019 — the annual increase in the CFPI has been negative. In other words, consumers paying less than what they were a year ago.
Such an extended phase of low food inflation or even deflation is, perhaps, unprecedented in the country’s history. The implications of it are both economic and political. The economic impact is reflected, among other things, in the RBI repeatedly getting its inflation forecasts wrong. As the RBI’s latest monetary policy resolution statement has pointed out, “food inflation has continued to surprise on the downside with continuing deflation across several items”. That has, of course, enabled the central bank to reduce its “repo” or overnight lending rate, which wouldn’t have been possible in the normal course.
The political fallout of low/negative inflation is agrarian unrest.
It may not be pure coincidence that the apparent rural backlash against the Narendra Modi government began roughly after May 2017, when the rabi crop planted just after demonetisation was getting marketed. The three months from May 2017 to July 2017 saw food inflation sliding into negative territory. A similar episode of negative food inflation has been witnessed since October 2018, which led to the ruling party Bharatiya Janata Party tasting defeat in Assembly elections in Madhya Pradesh, Rajasthan and Chhattisgarh. If this trend in food prices holds in the coming months, too, it may not bode well for the Lok Sabha polls either.