Farmers paying a heavy price to keep inflation under control

The focus on controlling food prices to manage inflation has overlooked the real drivers—housing, healthcare, and education. The economic model has failed farmers globally, and it’s time to address this imbalance, liberating farmers from being unjustly blamed for inflation while ensuring their livelihoods are no longer sacrificed for consumer convenience

Former Reserve Bank of India (RBI) Governor Raghuram Rajan is not in favour of leaving out food prices from headline inflation. “So, if you leave out some of the most important parts of inflation, and tell them, inflation is under control but food prices are going through the roof they would not have great faith in Reserve Bank.”

He made this statement at a time when the latest report of the Situational Assessment Survey for Agricultural Households, based on 2018-19 field data, worked out the average income of a farm household at Rs 10,218 per month. A careful scrutiny showed that the income from farming activities alone (excluding non-farm income) stood at a paltry Rs 27 per day.

Now you will ask me what the connection between the two is.

Well, there certainly is a direct relation. Not only in India, farm incomes are at the rock bottom everywhere in the world because of the asymmetric effects of a monetary policy that has very conveniently blamed rise in food prices to be a universal driver of headline inflation. Every time the Government announces a higher Minimum Support Price (MSP) for kharif and rabi crops, newspaper editorials warn of its impact passing on to non-food items and thereby leading to headline inflation.

There is concurrence among mainline economists to see that farm gate prices are not raised in the same ratio as was recommended by the Swaminathan Commission (which suggested a profit of 50 per cent over a comprehensive cost). So much so that in an affidavit before the Supreme Court, the Government had warned that paying farmers by the C2+50 formulas would distort markets. As I have repeatedly said, the same kind of economic thinking fails to find any market distortion when food companies try to extract as much profit as possible from gullible consumers in the name of inflation. In the US, during and after the pandemic, food and beverage giants have jacked up consumer prices by as much as 70 per cent (at the time of the pandemic) and even now corporate profit is considered to be responsible for at least 40 per cent of the retail prices. Strangely, barring a handful few, no one cries market distortion in America.

Nevertheless, a flawed economic thinking has ensured farm prices are kept low for farmers. Controlling the ugly head of inflation by a barge of anti-inflationary measures primarily to control food prices has definitely cast an ominous shadow over farming.

When the Chief Economic Advisor, V Anantha Nageswaran, had (through the Economic Survey 2024) called for ‘re-examining’ the existing inflation-targeting framework, and pitched for keeping food prices out, I thought here was an attempt to go in for a long due course-correction. After all, it was only in April 2024, that I had first raised this question in an article as to how can an economy, racing to become the third largest economy in the next few years, gets rattled by a rise in prices of the ubiquitous aloo (potato) and pyaaz (onion). It is primarily the volatility in vegetable prices that often raises tempers. I knew it was a difficult proposition given that over the years the society at large has been programmed to believe that when it comes to inflation food is the culprit.

It is primarily to transition to an urban economy that an economic design to sacrifice agriculture has been well laid out. For over decades, policies that ensure food prices do not cover even the cost of production are well laid out. While farmers toil hard, sweating it out in crop fields, the remuneration they receive for the hard labour put in is hardly a pittance. With such low wages, they believe it is a curse to be born as a farmer. They must have done something wrong in the past birth that has landed them on the farm. Left with little choice, farmers have trudge to the cities looking for menial jobs.

An UNCTAD study sometimes in the middle of the decade of 2000 had shown that globally the farm gate prices for agricultural commodities when adjusted for inflation had remained almost stagnant between 1985 and 2005. It meant that the prices farmers were getting in 2005 were more or less the same as to what they received 20 years before, in 1985. Later, an OECD study had shown conclusively that Indian farmers had suffered a loss of Rs 45-lakh crore in 16 years, between 2000 and 2016. The loss farmers suffered brought a cheer to consumers. While farmers earned 15 per cent less on an average when compared with international prices, consumers gained by 25 per cent by way of cheaper prices.

In other words, output prices for farmers in India had remained unchanged in a period of 40 years, between 1985 and 2016. In reality, this is the cost farmers have borne to keep economic reforms viable. Food prices are kept low not only to ensure that inflation does not go out of the roof but also to enable the industry to get cheaper raw material and cheaper labour.

While mainline economists treat food as the villain of the inflation story, it is housing, health and education in reality that drives real inflation. Ask any family, whether poor or in the middle class, it requires a lifetime savings to pay adequately for children’s education, meet family’s health expenses and to ensure housing facility for a family. But when it comes to the Consumer Price Index (CPI), roughly 46 per cent weightage is ascribed to food items whereas the more burdening expenses for any family – in health, housing and education – gets a nominal weight. This keeps the focus on food while the average household remains burdened with the ever rising cost of aspiration that a family has to take care of.

When a member of the family is admitted to a private hospital, the family goes into bankruptcy. Providing a higher education to a ward costs a family a fortune (often supplemented by bank loans). Not only buying a house in a trendy society costs a few crores, even a two room house in a government society in a Tier-1 city is nowadays costing upwards of Rs 2-crore.

But strangely, the blame invariably comes to aloo pyaaz for a rise in inflation.

Inflation certainly needs a reality check. Farmers have paid a heavy price to keep inflation under control. Generations of farmers have lived in poverty simply to ensure cheaper food for consumers and provide cheaper raw material for the industry. Further, the supply chains are so designed that while all stakeholders rake in profits, its only farmers who stay at the bottom of the pyramid. This is how the system is designed and crafted to keep farmers perpetually poverty-stricken. All this has to change. It is time to let farmers free, and not to hold them responsible in future for any inflation shocks.

(The author is a noted food policy analyst and an expert on issues related to the agriculture sector. He writes on food, agriculture and hunger)