Inflation management: Time to explore an alternative paradigm

livemint.com:

Nirmala Sitharaman cautioned against raising interest rates for inflation control at the cost of economic growth. Attempts by the government to control inflation through coercion and bans have largely been counterproductive. Much of our food price inflation, especially in cereals and pulses, is a result of domestic supply shocks.

In the case of wheat, it was a heatwave and unseasonal rains which hit output. In the case of rice, unevenly spread and deficient rainfall is to blame. While international price movements have also played a role, the government’s reaction worsened matters.

Boasting of “record output" when all indicators pointed to a decline hurt the credibility of its efforts. While the government banned wheat exports in May 2022 soon after claiming to feed the world, subsequent actions on stock limits have only created a fear of rising prices. It fared no better on rice, with a ban on common variety exports followed by a minimum export price for basmati.

The situation in pulses is similar. Their output has been declining for the past two years. As against a target of 4.6 million tonnes of tur production, third advance estimates for the current year suggest overall production of just over 3.4 million tonnes, the lowest after 2018-19.

While the steps taken by the government have been largely ineffective and it has failed to meet its procurement targets for the last two years, the cost of its inflation-control measures are borne by farmers. Given that the supply shocks were well known, a better strategy would have been to raise procurement prices to get more from farmers. Higher procurement and distribution of cereals and pulses through the Public Distribution System (PDS) would have been a better way to insulate