Managing to maintain a low inflation sounds good for any government especially during election year, correct? Not in India – here’s why.

September Consumer Price Index (CPI) resulted to be 3.8% year-on-year which is still far from the Reserve Bank of India’s target of 4 percent. Although all other CPI components have been on an upward trend this year, India’s major concern is their food prices – CPI eased to only 0.5 percent increased from 2.8 percent in April.

For Prime Minister Narendra Modi, these passive inflation numbers may present a budget problem. This could well lead to India’s government having to compensate farmers for low market prices of some crops by forking out more money and hence, going over budget. This is even more of a probability due to a plan they announced this year with a view to double farm incomes by 2022.

It was in July that the government raised support prices of crops such as cotton, soybeans and paddy rice to ensure farmers get at least 50 percent more than the estimated production costs. That means in the event of a crash in market prices, the government would have to chip in and ensure sale of the produce by farmers at guaranteed prices.

This contribution would cost the government an additional 150 billion rupees i.e. $1.8 billion, and given that India aims to keep its budget gap at 3.3 percent of gross domestic product in the fiscal year to March 2019, the government might not be able to stick to it.

Three plans

In September, the government approved three plans that should ensure 50 percent profit over the cost of production of certain crops. These were based on the rationale that how much the government needs to spend depends on the method used by states to support farmers.

According to the farm ministry, under the price-support plan, government agencies will buy pulses, oilseeds and copra with the help of state governments. The expenses and losses due to the arrangement will be taken up by the federal government as per norms.

The price-deficiency payment plan was proposed to cover all oilseeds. In this case, farmers will be paid the difference between minimum prices and the rate at which they sell their produce in the market. Under this plan private companies will also be permitted to buy some crops. The already established plans of the government to buy certain crops will remain in action.

At the end of the day, should the government have to match up the profits the farmers are not managing to make will strain its finances and offset budget targets. Apart from that it would lead to misleading prices on the open market. Yes these plans might be a solution but it seems that the government does not even know why the problem is occurring in the first place. Why is it that such a basic need – food - having so much trouble? This is what the Indian government should be focusing on.

This article was issued by Maria Fenech, investment manager support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.