India’s Goldilocks economy isn’t serving everybody well—deflation has left rural parts in distress

Much of India’s unexpected economic buoyancy is attributable to a deflationary trend, including a 3.5% rise recorded in agricultural output in constant prices.

But our national accounts also show that growth in agriculture in current or nominal prices—that is, with the effect of inflation included—was only 1.8%. For the broader primary sector, real growth was 3.1%, while nominal growth was just 1.2%.

This gap was seen in some other sectors too; real growth exceeded the nominal increase. This is explained by falling prices, which inflate estimates of real growth. Since the sectors where this has played out (agriculture, construction, hotels and trade) are largely informal and employ almost two-thirds of India’s workforce, it is a worrisome phenomenon.

Deflationary pressure is also visible in inflation measured by the wholesale price index (WPI), with prices posting an even sharper decline; headline WPI inflation has been negative in four of the last six months, including the last two. Prices of food articles have declined consecutively for seven months. In fact, almost all major categories of food, from cereals, pulses and spices to fruits and vegetables, have shown deflation for almost six months. As for other items, prices have been stagnant.

The CPI shows a similar trend; food inflation has been negative for six months. This has now spilt over to non-food categories, which are seeing prices rise very slowly.

Deflationary pressure has not arisen from any single category, nor is it due to seasonal variations. It is part of a general trend. While a higher price base last year would have had some impact, it alone does not explain the sustained decline in prices. Part of it is also driven by a decline in global food prices.

Overall, low inflation may be a boon for policymakers—specifically India’s central bank, which reduced its policy interest rate by 125 basis points last year. But it may also signal stress in sections of the economy, as some other pieces of data seem to suggest, particularly in rural India.

Agriculture appears to be the hardest hit, with prices in wholesale markets for many major crops now below India’s official minimum support prices (MSPs). Wholesale prices of major crops such as pulses, oilseeds and cotton are below these state-set levels. Soyabean prices have fared the worst.

On the other hand, input prices are rising. Fertilizer prices have risen partly due to costlier imports, but also due to supply shortages in the domestic market.

This has hit the income of farmers. In any case, farm incomes, when measured in terms of income per cultivator, have seen a real decline since 2016 and there appears to be no reversal of this trend. While there has been some uptick in rural wages for agricultural work, non-farm wages have stagnated. Recent reports also suggest an increase in loan defaults in the agricultural sector, another sign of stress.

To put this in perspective, the recent spell of weakening prices for almost six months has been the longest in the past six years. In general, while low inflation may be driven by many factors, it signals declining incomes and thus demand in the economy. Domestic demand, be it consumption or investment, has failed to lift off.

Unfortunately, government efforts to boost demand have focused more on the urban middle class and tax-payers, who have received concessions. But the rural economy has largely been left out. Moreover, with the government now moving to a restructured rural employment guarantee programme, even the modest job cushion that was available to the rural poor is likely to weaken.

Whether low inflation and apparent high growth signify a ‘Goldilocks’ moment or signal an impending phase of stagflation is not an easy distinction to make at this juncture. But it validates secondary evidence of a demand crisis in India’s rural economy.

Given the prevailing uncertainty on the external front, reviving domestic demand is the only option for India’s policymakers. The surest way to do this is by raising income levels across the economy, particularly in rural regions. This requires the government to raise fiscal spending aimed at doing just that.

The author is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi.