An economic debate that originated in the nineteenth century England and that appeals to students of economics even today is the debate over Corn Law (1815). On the eve of the Industrial Revolution in England, the efficacy of the Corn Law (1815) that banned the import of cheap food grains from India or elsewhere, was a matter of severe contradiction among supporters of landed aristocracy and supporters of industrialisation until it was repealed in 1846. Famous classical economist David Ricardo, one of the most powerful personalities of the then England, went against the Corn Law. Ricardo felt that cheap corn prices would reduce the wage rates of workers and that would help in reducing prices of industrial products. And that economic logic holds true even today.
Recent trend of food prices in India
A few days ago, the Ministry of Labour published the All India Consumer Price Index data for agriculture and rural labourers. The report states that prices are rising in July as compared to June 2020 for many essential items. A departmental press release clearly shows that the general price index is rising and that is mainly due to a large rise in the prices of food items. As shown in the diagram, the year on year general inflation started rising from July, 2019 (7.21%) and reached 14.29% in December 2019. It started to decline mostly from February 2020 but rising food inflation has ensured a not-so-sharp decline.
Economic analysis on rising food inflation
It is seen that the food price inflation has been rising for more than a year, that is it was rising even before the Covid 19 pandemic. The RBI expected that it would come down in January-February 2020. But that did not happen. It is said that food price inflation is due to the supply constraint and that its wholesale price is more or less stable. This means to control food price inflation the remedy would be to ensure a smooth supply chain of food products. In that case, why do different institutions like the RBI apprise about a possible downward trend?
The importance of a low food price level is that it helps an economy to be competitive. This is important in the present globalised world. Otherwise cheaper goods would be imported from other countries. India has had a bitter experience in the past during the NDA government led by Atal Behari Vajpayee. Cheap import of food grains and many other essential items destabilised our agricultural sector to a large extent. Later it was managed. Therefore, the food price level is an important factor for the economy. A common notion is that high prices could help the farmers and they could increase investment in agriculture if it led to surplus income in their hands. This would increase productivity in the sector. Actually, the income of the farmers has to be increased by the government through different fiscal policies like suitable minimum support prices and setting up of agricultural and rural infrastructure.
Rural infrastructure is needed
The huge intervention in the food market by supplying rice to about 800 million people along with pulses, potatoes and some other necessary items has not been able to lower the prices of food items. Therefore, even Michael Patra, Deputy Governor, RBI was seen to be worried about the food price increase a few weeks ago. He had stated that if food price - the ‘true core’ of inflation dynamics - have gained a toehold that could spill over to generalised inflation. Shakti Kanta Das, Governor, RBI has suggested that the government must conduct more open market sales of cereals and import pulses and edible oil. But this may not ease the problem if the supply chain does not work properly.
The Indian government has promised to spend considerably in framing better rural and agricultural infrastructure and stated that the private sector would participate in it. If implemented, this would boost the Indian economy.