January 24, 2019

India now faces its own version of Soviet Union’s scissors crisis

In this Mint article, Research Director and Senior Fellow, Niranjan Rajadhyaksha writes on the terms of trade between agriculture and industry, and the ramifications they hold in India's political economy. Excerpts:


"Successive governments have struggled to deal with the terms of trade between agriculture and the rest of the economy. The United Progressive Alliance had tried to engineer a structural change in favour of the rural economy through higher minimum support prices as well as the rural jobs programme. It did spark off a rural boom. However, food inflation began to climb. It stayed in the double digits for 19 months in a row from June 2012 till December 2013.


This soon spilled over into generalized inflation. India battled an inflation crisis in the early years of this decade even as the rest of the world was facing deflationary pressures. The National Democratic Alliance went the other way. It had to quell an inflationary fire. The decision to temper the annual increases in minimum support prices helped bring down food inflation. Critics of inflation targeting have also argued that farmers have had to bear the brunt of the sharp disinflation over the past four years.


Higher food prices benefit those who are net sellers of food. Lower food prices benefit those who are net buyers of food, including rural labourers. Managing the distributional politics of food prices has foxed successive governments. However, it is not a distributional issue alone. Low nominal income growth in rural India—if not an actual decline—also hurts demand for various industrial goods. The fragile home market for industrial products plus the weak foreign demand for them is one reason why Indian production has faltered in recent years...."


Read the whole article here.

Topic : Transitions / In : OP-EDS
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