Indian farmers have borne the brunt of the government’s efforts to control inflation, with a series of measures potentially costing them ₹45,000 crore (approximately $6 billion) in income this year, according to a study by economists at the Indian Council for Research on International Economic Relations (ICRIER). The high inflation plaguing the nation for over a year, primarily driven by surging food commodity prices linked to extreme weather conditions, has prompted government actions that, while aimed at curbing inflation, have had an adverse impact on the agricultural sector.
Inflation in India reached 6.83% in August, significantly exceeding the Reserve Bank of India’s target of 4% (plus/minus 2%). The previous month saw prices soar to a 15-month high of 7.44%. The government’s response to these rising prices has included a range of restrictions on food commodity trade and the imposition of export taxes to increase supplies. However, these measures have not been as effective as desired, especially in the context of persistently high cereal prices.
The challenges faced by Indian farmers have been exacerbated by a deficient monsoon caused by the El Nino weather pattern. This has raised concerns about a potential decline in food output this year, particularly for pulses, sugar, and oilseeds. El Nino events are characterized by a warming of the Pacific Ocean, and their consequences are felt worldwide. In India, these events often disrupt the crucial summer monsoon, which irrigates nearly half of the country’s net-sown area. The livelihoods of half the population in India, Asia’s third-largest economy, depend on agriculture.
The federal body responsible for recommending minimum support prices for crops
Balancing the need to maintain affordable food prices for consumers while ensuring adequate income for farmers has long been a challenge for Indian policymakers. Previous research, led by renowned economist Ashok Gulati, who also headed the federal body responsible for recommending minimum support prices for crops, revealed that India’s food policies tend to prioritize consumers over farmers.
One significant instance of these policies was the ban on wheat exports imposed in May 2022 when global prices were high due to a decline in output caused by a heatwave. Despite India achieving a record wheat output of 112 million tonnes this year, wheat prices remain elevated. In an effort to curb inflation, the government released its own wheat stocks at substantially lower prices than the market rates, effectively reducing farmers’ income.
The ICRIER study estimates that farmers collectively lost an astounding ₹45,283 crore due to the sale of wheat at reduced prices under the open market sales scheme (OMSS). While the government had set a minimum wheat price of ₹2,125 per quintal (100 kg), market prices had surged to ₹2,673 per quintal in January this year. The government intervened by offering its wheat at substantially reduced prices to traders, beginning at ₹2,350 per quintal and later dropping to ₹2,150. In the absence of this market intervention, farmers could have potentially earned an extra ₹548 per quintal.
The inflation in rice and wheat has remained in double digits for nearly a year. In response, the government implemented several restrictive trade practices, including imposing a minimum export price of $1,200 per tonne on higher-grade basmati rice and imposing a 40% duty on overseas onion shipments in August 2023.
While the government contends that key commodities, such as rice, wheat, and sugar, are adequately available, it has discovered attempts to create artificial scarcity under the pretext of a poor monsoon. An earlier study led by Ashok Gulati and ICRIER, in collaboration with the Organisation for Economic Co-operation and Development (OECD), found that the government’s emphasis on keeping food prices low was one of the primary reasons for the low income of farmers. The study recommended revisiting restrictive market policies and increasing income transfers to farmers from ₹6,000 to ₹10,000 annually to offset losses.
