How Modi’s ‘war on inflation’ ruined India’s agricultural economy
Consider the onion: It is a staple of the Indian diet, and no other crop has more influence on India’s political economy.
Toward the end of 2019, when for the first time under Narendra Modi’s Bharatiya Janata Party (BJP) government the price of onions rose significantly, there was a clamoring to contain it. Between August and December, prices had shot up by 253% — the highest increase in a decade — prompting Modi’s bureaucrats to ban the export of onions, suppress stockholding limits, and ease imports. This flooded the market with produce and reduced prices, but it riled up farmer unions, which said that instead of fixing flaws in the supply chain, the government was hurting their incomes. When prices collapsed, angry farmers dumped onions on the streets and threatened unrest. The press described this as the “onion bomb” at Modi’s doorstep.
But there was little new in this.
In 1998, when the price of onions spiked and the then BJP government struggled to control it, it brought down the government in state elections held in Delhi. In 2010, a dramatic rise in prices sent shockwaves across the political establishment, pushing Prime Minister Manmohan Singh to declare it a “grave concern.” Rewind further back to 1980, and Indira Gandhi called the general elections in which she defeated India’s first non-Congress government and made a political comeback the “onion elections.” Indeed, Modi also owed his election partly to onions.
“There were bets on whether [cricketer] Sachin [Tendulkar] would score a century or the price of onions,” Modi had said at a campaign rally in 2013, drawing waves of laughter. In September 2013, the price of onions had increased by 245% year on year, and the Congress government was struggling to control it. A leading business daily described this as “fantastic news for Modi.”
So when Modi faced a similar dilemma as the previous government, he bypassed the concerns of the onion farmers and proceeded with tough measures to cushion the impact of high prices on hundreds of millions of poor and low-income households and placate India’s noisy and influential middle class, a price-sensitive electoral bloc that was instrumental in sparking popular discontent against the Congress government.
Economists have criticized the policy of enacting slapdash draconian measures when faced with the slightest rise in inflation. However, these measures provide a window into the administration’s preoccupation with the political economy of keeping food prices low lest it spark discontent among the party’s base, a large chunk of which is made up of India’s aspirational middle class. The result has been a worsening of the crisis that has plagued Indian agriculture for over a decade. Early in his first term, Modi promised to double the incomes of India’s farmers, a promise he repeated in India’s state election campaigns, but, in reality, his agricultural policies achieved the opposite. Lower inflation — which usually means low food prices because India’s Consumer Price Inflation basket carries a higher weightage for food — has depressed farm gate prices so much that in the financial year 2018-2019, farmers’ incomes crashed to a two-decade low.
“In the name of the poor, you have robbed the farmer,” Ashok Gulati, an eminent agricultural economist in New Delhi, told The New York Times last year.
This has generated a deep distrust among tens of millions of India’s farmers, and they have hit the streets in protest, with tens of thousands marching in the financial capital Mumbai in 2018, and in many small and large protests across the country since then. The distrust was visible again on December 8 this year, when dozens of farmers’ unions called for a nationwide general strike in response to the government passing three farm laws that seek to deregulate India’s agricultural sector. Even as experts agree that the sector needs an overhaul and agricultural economists believe that this is a move in the right direction, tens of thousands of farmers are camping at New Delhi’s borders, blocking roads in protest, and calling for a repeal of the laws. “This government is full of lies. To trust the Modi government is like strangulating yourself,” one farmer at the protest told The Wire.
The crisis that helped Modi become prime minister could be his undoing
Behind these policies, however, is Modi’s fear that he could suffer the same fate as his predecessor, the Congress party, did in the run-up to the 2014 election. The crisis that helped Modi become prime minister could be his undoing.
On a cold, overcast day in February 2014, tens of thousands of people gathered on a large expanse of dusty land for a hotly awaited election rally in Sujanpur Tira, a small town in the north Indian state of Himachal Pradesh. India’s general election was just three months away and there was tangible excitement among the people. When the star challenger, Narendra Damodardas Modi, appeared on the dais, he was beaming. The crowd roared and waved. His hour-long speech was replete with promises, innuendo, and calls for change in the country that he believed suffered under the Congress Party that had been in power since 2004 as part of the United Progressive Alliance (UPA) coalition. He said that he would bring development and unity to the country, eradicate poverty, and end corruption.
At one point, Modi spoke at length about inflation, an issue that he had made a top priority. In the preceding years, India’s economic growth had slowed down, and food inflation, in particular, was high, sparking popular discontent. Modi had astutely grasped this and used emotive rhetoric to turn this into an overriding concern.
“The Congress party is talking about King Ashoka … it is talking about Lord Buddha. Suddenly, they are reminded of these great men, but they cannot remember the citizens of my country who are suffering from inflation. They are not ready to talk about inflation … not ready to apologize to the people for failing to bring down inflation!” Modi said.
After comparing the public to the gods, he called on the “politicians of this country to bow their heads in front of the people and be answerable to them” for high inflation. The crowd exulted.
In his campaign for the top post, Modi had tempered his divisive anti-Muslim politics and focused on his “new vision for development” in one of India’s most important elections.
Three months later, in May 2014, Modi’s BJP won the elections by a landslide.
In the aftermath of victory, a post poll survey by Lokniti, a research program at the Centre for the Study of Developing Societies (CSDS) in New Delhi, found that economic revival and income growth were key concerns among voters. But it was rising prices or high inflation that was critical in shaping voters’ perception of the government’s economic performance. According to the survey, Indians who thought that their economic condition had worsened in the last five years were more likely to blame inflation. “This clearly indicates that Modi would be unable to build a positive perception of economic revival unless he is able to control the [price] rise,” Lokniti noted in its findings.
When Modi embarked on his election campaign with the promise of development and economic growth, a large section of the national and international press had backed him on the premise that he will reform the Indian economy, putting the country back on the geopolitical map as a democratic counterweight to communist China.
“There may be no one better qualified than the forceful Mr. Modi to kick-start the investment cycle and slay stagflation,” The Economist editorialized.
The situation looks very different today than when Modi espoused hopes for a new, prosperous India. In the months leading to Modi’s re-election campaign in 2019 — an election that he won by a much stronger mandate — the “reformer” had turned into what TIME magazine in a cover story called “India’s divider in chief.” Before the 2020 pandemic hit and devastated India’s economy, economic growth had already slowed to record lows and unemployment had reached a 45-year-high of over 6%. But Modi’s government prioritized its Hindu nationalist agenda, clamping down on Kashmir’s autonomy, threatening to strip millions of Muslims in Assam of their citizenship, and eroding India’s democracy.
Modi, however, did keep his promise. Immediately after coming to power in 2014, his administration initiated what the mainstream press labeled “Modi’s war on inflation,” a series of policy moves that had the backing of India’s middle class, most of whom live in the country’s urbanizing towns and cities. Food inflation, which was at a high of about 12.2% in 2014 under the Congress government, was brought down to just 0.1% in the 2019 fiscal year.
But this “war” badly hurt agriculture, which still employs close to half of India’s workforce. The sector had been in crisis since at least 2012, for a plethora of reasons: accumulation of stress from previous years, knee jerk policy interventions, lack of infrastructure and investment, and poorer price realizations for farmers already hit by a slowing rural economy.
“This is a complex economic issue. Every consumer is also a producer in an economy. Achieving a balance is not easy. Low retail food prices, one might argue, is a good thing. But if it affects farm producers adversely, then it exacerbates inequality in society,” Praveen Chakravarty, head of data analytics for the Congress party, told Newlines. “I am not sure the Modi government either has the intent or the intelligence to address such complex issues and frame policies accordingly.”
Chakravarty said that Modi had a unique opportunity to make structural reforms in agriculture: Oil prices were low, the global economy was robust, and he had a full parliamentary majority. “But [he] failed to do so and hence farmers were directly impacted.”
Economic and agricultural reforms, structural changes, regulatory deregulation, etc. — these were the promises made during the election campaign that helped allay the concerns of the liberal elites and make Modi acceptable. But within the party, there was an understanding that their mandate had little to do with this agenda.
“Look, common people do not think in terms of big words such as economic reforms and structural changes. Even senior BJP leaders would not have mistaken that big economic reforms would be brought to deliver the promise of acche din [‘good times,’ one of Modi’s most popular election slogans],” Sanjay Kumar, director of the Lokniti program at CSDS, told Newlines. “Figures such as high or low GDP do not matter to people on the ground. What matters to them is price rise.”
Kumar said that the political mastery of the BJP — and especially Modi — is that it has the pulse of the people and has built its popularity around appeals to Hindu nationalism, support for building a temple, and promise of revoking Kashmir’s autonomy. But he cautioned that if the government couldn’t keep prices in control then it would be difficult to maintain support among its base.
“The top leaders in BJP are very much aware of this. Mr. Modi and the BJP are very clever in connecting with people’s anxieties,” Kumar said.
Over the years, farmer suicides have risen in India as the terms of trade under Modi have shifted against agriculture. In 2019, according to India’s national crime bureau, more than 10,000 farmers killed themselves.
Between 2004 and 2012, at a time when India’s economy was booming, and when the Congress-led UPA coalition was in power, the agriculture sector had registered robust growth. In India, agriculture is regulated, and farmers sell produce to the government at a price that authorities consider remunerative. Under Congress, between 2004 and 2013, there was increased investment in agriculture, and the government provided higher Minimum Support Prices (MSP), doubling it for major crops like paddy and wheat. Global commodity prices were high, and through the MSP, the government decided to pass the benefits on to the farmers.
Though this move later led to inflation, farmers benefited from the increased prices, which increased farm incomes and provided a boost to the rural economy. This chain of events lifted close to 271 million Indians out of poverty between 2005 and 2016, according to the United Nations’ Multidimensional Poverty Index. But India’s economic growth drastically slowed in 2012 and inflation rose sharply at a time when the government was mired in a series of corruption scandals.
“By the time the BJP government had won, the view had shifted politically … that the number one problem was inflation. There was a view held by the top leaders in the BJP that because inflation was so high and the government was perceived to be corrupt, the UPA had lost,” a senior economist with knowledge of the matter told Newlines. “Hence, they were more inclined to tackle both of these problems.
“There was also a belief among them that inflation was being generated by very large increases in MSPs that happened under the previous UPA government,” the senior economist said, pointing out that even a dubious policy measure such as demonetization — Modi’s 2016 attempt to flush out black money by requiring banks to withdraw notes of 500-rupee and 1,000-rupee denominations “was in fact enormously popular among people because it was perceived as a serious attack on corruption.”
By 2014, both oil and international commodity prices had crashed, and India’s agricultural sector was reeling from back-to-back droughts. But soon as Modi came to power, Consumer Food Price Inflation fell to 7% from about 13% the previous year. In 2016, it fell to 5.5%, and by 2018, when general elections were just a year away, it had been reduced to 1.3%.
Himanshu (who goes by only one name), an economist in New Delhi’s Jawaharlal Nehru University, said that one need not look any further than the first annual budget of the newly installed Modi government to gauge what drove its larger policymaking. Modi had cut budgetary allocation for agriculture by a quarter compared to the 2014 fiscal year.
“I have been asking this question: Why would one reduce allocation toward agriculture when the sector is emerging from [the effects of] a double drought?” Himanshu told Newlines. “Bringing down inflation doesn’t mean you cut down allocation for agriculture. And I think that to bring down inflation is in itself a problematic agenda. This obsession with low inflation is hurting the farmers because it is hurting macroeconomic stability.”
While the government slashed spending on agriculture, farmers were already reeling under the stress of consecutive droughts and a fall in international commodity prices. But even then, the government didn’t pass on the benefits of low fuel prices to them. This meant that their input costs went up even as their earnings crashed.
“Why didn’t the government provide any fuel subsidy to the agricultural sector, for instance?” Himanshu said. “You can’t depress agricultural prices and at the same time not provide subsidy to cover input costs.”
During the mega rallies of his 2014 election campaign, Modi had promised that his government would increase MSPs for farmers. But after coming to power, the government walked back on its promise. In 2015, responding to a public interest litigation filed by a farmers union in India’s Supreme Court, the government plainly said that it cannot offer higher MSPs. Since at least 2015, average growth in MSPs for monsoon crops such as paddy, soybean, and millet has been just 4% compared to 13% for 2010-2013.
“The view in the government was — initially after inflation came down — that we should maintain low increases in MSP prices to keep inflation low,” the senior economist told Newlines. “One of the reasons they believed inflation was so high was because the UPA had substantially increased the MSPs. So one of their tactics after coming to power was to scale back those increases.”
In June 2016, for the first time, India adopted a flexible inflation targeting mechanism, with the government tasking the central bank with maintaining an inflation rate of 4% within a band of +/- 2%, a move that economists say resembles those of developed economies in the West.
“An economy where almost 50% of the total consumption goes into food cannot have the same inflation target as developed economies such as in Europe,” Himanshu said. “Even today [during the pandemic] the government doesn’t want to spend because it is worried about a higher fiscal deficit; the obsession with fiscal deficit, the obsession with low inflation comes with a very wrong understanding of economics.”
Himanshu says that the questions on how much the government should spend, how much it should let inflation go up so that farmers get satisfactory remunerations, or how much it should tax the super-rich, were political questions and not something that could be decided by economic theory. “The economists will try to explain it in every way using economic theory — what they won’t tell you is the politics of it.”
“Annual food inflation around 7 percent is actually desirable for farmers to stay in business,” Ajay Vir Jakhar, an agricultural expert and chairman of the Bharat Krishak Samaj (Farmers Forum), told the Mint newspaper this year.
Himanshu said that if the government wanted to, it could control inflation by increasing public distribution and procurement of agricultural produce. “If agriculture is not doing well then rural wages remain depressed; so what you are doing is hurting rural incomes in order to rein in inflation.”
Even with all the rural stress, and despite all the farmer protests during his first term, Modi managed to win re-election with an even bigger mandate than before. Kumar says that the data collated by him and his colleagues shows that despite all the failures, “the government successfully created a perception that it was working for the people. Even when some of his big-ticket policies have turned unpopular, people have not doubted his intentions.”
Kumar said that Modi boasted of one rare quality that is prized by the average voter, but which is not found in other politicians in India. “That he is not perceived to be corrupt is a big factor that works for him because in India people are generally not inclined to believe that any politician could be honest. This quality — or at least the perception of it — is an asset to Modi as a politician.”
Even though Modi won his re-election in 2019, the BJP has suffered defeats in state elections. The party recently lost elections in Chhattisgarh, Rajasthan, Delhi, Madhya Pradesh, and Punjab. “Of course, rural distress hurt the party in some state elections,” Himanshu said, pointing out that the BJP lost every state election after 2018.
Kumar said that even though it’s obvious that Modi did not improve the socio-economic conditions of India’s farmers, it has not dented his popularity among rural Indians. “This is because the farmer does not vote as a farmer in India. When they are protesting against rural stress by either marching or doing dharna, they are doing these as one collective bloc: farmers. But on the day of the vote, at the ballot box, the protesting, angry farmer is casting [a] vote keeping their identity in mind. At the time their loyalties are very different.” This means that farmers are increasingly voting based on their religion, caste, and demography.
He pointed to the difference between the rural and urban voters in India. Urban voters, who are more educated and more influential, and form the bulk of India’s aspirational middle class, have demonstrated that their vote can swing. “[But] in terms of political orientation, once the rural voters align with a political party, they stick to it for a long time.” Thus, in the face of inflation, the “proportionate swing of urban voters against Congress in 2014 was higher compared to the rural voters,” Kumar told me.
“The only thing that can hurt the BJP and Mr. Modi is a swing among the urban voters,” Kumar said, and recalled Modi’s election campaigns. “In 2014, the BJP used the issue of high prices in a very clever manner and they linked this with corruption … saying that the prices are high because of corruption in the government … [and] if there was no corruption, then prices would have been low.”
Even though food inflation was high in the run-up to general elections in 2019, the opposition failed to capitalize on this. And even as farmers struggled, Modi was able to keep them on the side that appeals to their identity, using Hindu nationalism.
In February 2019, on a wintry day in New Delhi, just three months from his re-election, Modi was addressing the parliament in response to criticism from the Congress Party over a spike in food inflation. Modi seemed relaxed, jovially reciting two Bollywood songs, both focusing on the high inflation during Congress rule.
“Mehengai aur aapka atoot nata hai. Is desh me jab bhi Congress aayi hai, mehengai hamesha badhi hai,” he said. “The Congress party and inflation have an unbreakable bond. Whenever they have come to power in this land, inflation has always gone up.”
In the last 55 months, he boasted, inflation had not broken the 4% threshold under his government. The house erupted in thunderous applause.
This article has been adapted from its original source
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