Good news, and bad: On the economy
As retail inflation ebbs, Government must focus on improving farmer income
India’s March retail inflation was down to a near six-year low of 3.34%, making it almost certain that the Reserve Bank of India (RBI) will cut its banks’ lending rate further over the next few Monetary Policy Committee meetings. The repo rate has already been cut twice in a row, by 25 basis points (bps) each, in February and April, bringing it down from 6.5% to 6%, signalling the emphasis on growth, amid global trade uncertainties, as the RBI’s concern over non-core inflation eases. Vegetable prices have plummeted over the past four months from the highs of October 2024, when food inflation peaked at 10.87%, the highest since November 2013. Food inflation in March fell to 2.69% aided by a contraction in the prices of vegetables (-7.04%), eggs (-3.16%) and pulses (-2.73%). The repo rate reduction has already begun translating into lower interest on bank loans. In normal times, this would translate into greater capital flows into businesses, thereby raising jobs, incomes and consumption. But it comes at a time of dampening investor confidence: U.S.-led tariff uncertainty is forcing exporters to scramble for newer markets, amid a concern over near-term demand contraction, as America has been India’s largest buyer of merchandise goods since fiscal year 2022. Easing inflation could raise domestic consumption and India’s sluggish industrial production.
What must concern policymakers more should be the steep fall in food prices, as this means lower farmer incomes, directly impacting rural consumption demand. Last December, the government procured eight tonnes of tomatoes in Kurnool, Andhra Pradesh, as prices in the local market plummeted to ₹1 a kilogram. In February this year, in Maharashtra and Madhya Pradesh, an 80% fall in tomato prices forced farmers to dump produce or use them as cattle feed. A 2022 study by the Ministry of Food Processing pegged India’s post-harvest loss at a whopping ₹1.52 trillion annually, ranging between 6% to 15% of produce depending on the crop and region. This is due to widespread shortages in cold storage facilities and temperature-controlled transport for perishables, and market inaccessibility for farmers. A significant 86% of Indian farmers make a living from less than two hectares of land. A 2021-22 NABARD survey pegged average monthly agricultural household income at ₹13,661. A more comprehensive NSSO 2019 survey estimates this to be ₹10,218. These figures are lower than those in other emerging economies such as China, Mexico and Brazil for the corresponding years. While rural consumption has been rising since the COVID-19 pandemic years, monthly per capita consumption expenditure for rural areas in fiscal 2024 was ₹4,122, while in urban areas, it was ₹6,996, indicating the significant gap that must be viewed as an opportunity, at a time when export growth is expected to be sluggish.