From UPSC perspective, the following things are important :
Prelims level : Nothing much
Mains level : Need for deregulating Agricultural prices
Current consumer price index (CPI) inflation levels allow enough “room” for continued monetary easing. Policy rate reductions beyond the 110 basis points are already affected this year.
- The credit for the going down of overall retail inflation to an average of 3.50% goes mainly to food items, which have a 45.86% in the CPI.
- Average consumer food inflation has been even lower, at 1.38%.
- If CPI inflation has to remain within the RBI’s target of 4%, it would hinge upon sustained low food prices.
- This leads to a temptation to engage in “supply management” to contain food inflation at any cost.
- Recently, the commerce ministry imposed a minimum export price of $850 per tonne of onions. 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 were consistently low for much of the last three years.
- Suppressing food prices through artificial means is not the way to meet the RBI’s inflation target.
- Between December 2018 and August 2019, annual WPI inflation for food articles has moved up from -0.42% to 7.67%. Retail food inflation is still only 2.99%. It should catch up with the trend in wholesale prices. ‘
- The supply disruptions and crop loss from excess monsoon rains — could lead to some rising prices. This is seen in pulses, maize, jowar, and soybean.
- The prices are recovering from lows and some are trading below their official minimum support prices.
- The government should not invoke the Essential Commodities Act or ban exports or permit duty-free imports.
Boosting farm incomes is more likely to guarantee an economic recovery than the slashing of interest rates.