Make farming climate proof
Inflation targeting won’t be very effective if agriculture can’t deal with climate vagaries
At 6.5%, retail inflation in January surprised everyone on the upside. With inflation once again going above the 6% upper limit of the Reserve Bank of India (RBI)’s threshold, the consensus about the central bank’s February 25 basis point rate hike being the last in the current cycle has begun to fray. To be sure, the April meeting of the Monetary Policy Committee (MPC) will have the benefit of having February’s Consumer Price Index (CPI) data and, more importantly, a better idea about this year’s wheat harvest. The former will pretty much ascertain the validity of RBI’s MPC’s inflation forecast of 5.7% for the quarter ending March and the latter will be crucial for future trajectory of wheat and, therefore, cereal inflation. Wheat inflation stood at 25% in January while cereals, as a whole, saw inflation of 16%. Things can go in two directions as of now.
First, the better-case scenario. A bumper wheat crop and (possibility of) a normal monsoon eases cereal prices even as the anticipated weakening of overall economic momentum reduces some pressure on core inflation numbers. Here, economic policy will have to pivot towards growth at some point, which intuition suggests will happen around the middle of the year as the 2024 general election comes closer. The only unknown in this scenario is the economic situation and monetary policy direction in advanced economies, especially the US. Second, the not-so-good scenario. A premature heatwave — it is too early to rule this out — leads to sub-par yields for wheat, El Nino weakens the monsoon, and hurts the kharif output. Cereal prices continue to increase and trigger a wage-price spiral in the economy. This will put pressure on the government to reverse its food subsidy reduction and may well impact the capex spending in the Budget. Any aggressive tightening of interest rates by RBI will only add to the growth problem.
Either is possible, but a caveat on inflation targeting may be relevant here. Inflation targeting is hailed as the gold standard of prudent macroeconomic policy where the central bank manages the balance between prices and growth without the government’s intervention. The reality, as the cereal price driven inflationary spike shows, is that this is often beyond the abilities of monetary policy. Interest rates, in this specific case, may not be able to deflate demand for cereals — not that such an end is even desirable. As the climate crisis increases uncertainty in agricultural production, India must invest in making its farming more resilient. Not doing this will make inflation targeting more an exercise in cloud gazing than anything else.