India’s headline inflation—the average increase in retail prices over the year-ago levels—has fallen to 6.83 per cent for the month of August 2023 from 7.44 per cent the month before. This is still above the upper limit of two-to-six per cent band of tolerance the Reserve Bank of India is tasked to keep it within. It is an important tool that can influence elections, especially because food inflation, which is a significant component of poorer households’ monthly expenses, can have a direct bearing on political fortunes. In the past, soaring onion prices have brought tears to the eyes of politicians, and dethroned governments, and left such a lasting impression that political parties take the humble bulb seriously.
Indira Gandhi had used rising onion prices to highlight the incompetence of the Charan Singh government, describing the hustings in 1980 as the ‘Onion elections’. In 1998, the fate of the ruling Bharatiya Janata Party (BJP) and of the newly-appointed Delhi chief minister Sushma Swaraj was sealed by the pungency of the prevailing onion prices. A popular campaign jingle coined at the time was, “Bijli, paani, aloo, piyaz, sapnon mein aate hain aaj (Electricity, water, potatoes, and onions are available only in dreams today).” In 2019, when the Union finance minister was questioned about the problems of onion farmers and the rising prices across the country, she tried to deflect the issue by saying that her own consumption of onions was low—a comment that attracted sharp criticism.
It’s a worry this time too. While the overall inflation rate, which is based on the Consumer Price Index (CPI), has dipped, food inflation, which is measured as the average price rise in twelve sub-groups within the CPI basket, is still high at 9.19 per cent. When two of the sub-groups – non-alcoholic beverages and prepared meals, snacks, and sweets – are excluded, the Consumer Food Price Index (CFPI) is even higher at 9.94 per cent. Within food, the inflation rate of vegetables is the highest at 26.14 per cent, while spices and pulses occupy the second and third places at 23.19 per cent and 13.04 per cent, respectively. Cereal prices rose at 11.85 per cent.
The gap between rural and urban inflation is particularly high, with the overall rural inflation of 7.02 per cent topping the urban inflation rate of 6.59 per cent. Urban India is doing far worse in food inflation, with a CFPI of 10.42 per cent, compared to the rural CFPI of 9.67 per cent. At 27.87 per cent, vegetable inflation in urban areas is 2.8 percentage points lower than the rural rate of 25.07 per cent. Again, while pulse prices rose faster in urban than in rural India, the rural inflation in spices and cereals exceeds its urban counterpart.
A greater variance is seen between the inflation rates in states, possibly pointing towards differences in inflation management. Delhi has the lowest inflation rate at 3.09 per cent, followed by Assam at 4.01 per cent and West Bengal at 4.79 per cent. With the national elections next year and Assembly elections in five states before that—Mizoram, Chhattisgarh, Rajasthan, Madhya Pradesh, and Telangana—we can expect allegations and counter-allegations on inflation between some of these Opposition-led state governments and the Centre. Of the large states going to polls, Chhattisgarh and Madhya Pradesh have lower inflation rates than the national average, while Rajasthan and Telangana have reported inflation rates of 8.6 per cent and 8.27 per cent—1.77 and 1.44 percentage points higher than the national average.
The Delhi government has claimed that its policies of “free education, free healthcare, free public transport for women, free water, free electricity, free pilgrimage”, besides “honest governance”, are responsible for having an inflation rate almost half the national average. While such management techniques may be viewed as myopic, populist and costly on state exchequers, the point is that inflation cannot be seen as a monetary phenomenon alone.
Inflation management will have to involve the states learning the best practices from each other. Take the case of the supply side of onions. The National Council of Applied Economic Research’s 2015 report states that the production growth of onions in Maharashtra, the largest onion-producing state, was 12.8 per cent between 2000-01 and 2013-14, which was lower than the all-India growth of 13.2 per cent. The largest growth rate in onion production was posted by Bihar (26 per cent), Madhya Pradesh (19.3 per cent) and Karnataka (15.2 per cent), while Uttar Pradesh, Tamil Nadu and Andhra Pradesh registered the lowest growth rates over the decade.
Much of the production increase in high-producing states such as Maharashtra came from a growth in the cultivated area, in which the yield or per-hectare production was low. In five states—Maharashtra, Andhra Pradesh, Gujarat, Uttar Pradesh and Tamil Nadu—the yield grew at less than three per cent a year, while the average yield was less than 15 tonnes a hectare. Yield growth’s contribution to production growth was the highest in Rajasthan.
Clearly, low-production states will need to pay attention to improving their yield and productivity, which is the ratio of output to input. They will need to invest in better supply chains and cold storage facilities in order to manage inflation better. Traditional measures have revolved around either importing essential foods during periods of shortage or raising the minimum price to prevent exports. Such measures, which prevent the markets from working efficiently, will simply lead to farmers not having incentives to produce any longer, or depriving them of the benefits of free markets.
The narrative for inflation management from the supply side will need to be driven by the responsible state governments rather than the more populist ones.
Tulsi Jayakumar
Executive Director, Centre for Family Business & Entrepreneurship and Professor, Finance & Economics at Bhavan’s SPJIMR
(Views are personal)