Interest rate hike in focus as inflation falls

Wholesale and retail inflation of 2.17% and 2.18%, respectively, in May makes a great headline for the government, leaving home makers happy too, but it also tells an underlying story of rotting onion, potatoes and other farm produce contributing a great deal to the nationwide crisis among farmers who are up in arms against the government, seeking loan waiver. Breaking it down, the Consumer Food Price Index has slipped into a deflation by 1.05% in May, 2017 from inflation of 7.47% in the same month a year ago. Further, segregation of the data shows nothing but distress being felt by farmers. Prices of vegetables year-on-year fell by 13.44% at the retail level while on a measure of the Wholesale Price Index, prices of veggies fell by over 18%. The situation for pulses growers is even worse with the sub- index falling sharply by close to 20%. With potato prices dropping by whopping 44%, the growers are in real crisis.

Ironically, the rural stress has not come about because of drought or any other natural cause, but in a year of plentiful farm produce. Good monsoon last year and a similar weather outlook this year should normally bring smile on the faces of farmers. Instead, they are in distress. Whatever the government may claim about the ill-advised demonetisation, it too has left a trail of disruption in the farm mandis. While the loan waivers may win some reprieve to states, the solution lies elsewhere. The terms of trade must improve in favour of farmers and they cannot be left to the vagaries of the market which is distorted by the hoarders, middlemen and even the governments at times. The governments announce year after year increase in the Minimum Support Price, but makes no adequate arrangements for procurement with the result that the produce rots in the open in the mandis.

On the other hand, with private sector operating at much below its existing capacity, the industrial output could grow by a modest 3.1% in April, telling a different story of distress. Indebtedness of large volume has not only been a problem for the borrow-ers but more for the public sector lenders which are not able to resolve the mess of the non-performing assets. Under such a scenario, the only option left is to drastically reduce the policy interest rates by the Reserve Bank of India with the CPI inflation slipping much below the target of 4%. Instead of making it an issue of one-upmanship and autonomy, the Monetary Policy Committee of the RBI should see reason and go for a rate cut without any delay.