Prices of pulses indicates the pulse of the economy – and it’s not good

• The Economic Survey and economists have divergent theories on why the prices of pulses spiked.
  
  
• Economists say that prices of pulses behaved erratically during the last few months of 2019, and their theory is calculation errors.
  
  
• The economic survey has named a phenomenon called ‘cobweb theory’ to explain the price rise anomaly.
  
  

In 2019, a simple meal of daal-chawal burned a hole in people’s pockets. Apart from onions and tomatoes, there was a third food item which pushed up food inflation – the pulses.

Unlike the vegetables where rains ruined crops, the Economic Survey and economists have divergent theories on why the prices of pulses spiked – a question a lot of Indians want answered.

In December 2019, prices of pulses -- tur, urad, moong and others – rose 15.4% compared to a 7% decline a year earlier, as per the survey tabled in the Parliament today said.

Mandi prices versus retail prices

Economists too claim that the prices of pulses behaved erratically during the last few months of 2019, stressing household budgets severely.

Their theory is calculation errors. In the case of pulses, unusually, wholesale or mandi prices rose faster than retail prices. “We find evidence that retail food prices vis-à-vis wholesale food prices decline slowly when inflation is declining and rises at a much faster pace when inflation is rising indicating that inflationary expectations are always entrenched and takes time to die down,” said a recent report by SBI Ecowrap.

From vegetables to daal-chawal

However, the pulse price spike had many factors. One of them is the rising prices of vegetables that made households shift to protein option i.e. pulses. But that too takes two months to reflect in price hikes.

This time around, the price rise came faster and higher. This is explained by the little confidence of consumers and their mentality which has an effect on consumption patterns. Ecowrap believes that dated data used by Consumer Expenditure Survey (CES) to calculate retail inflation “may be misleading and overstated”.

Government’s cobweb theory

This, however, is only one side of the story. The economic survey has named a phenomenon called ‘cobweb theory’ to explain the price rise anomaly. “The farmers are caught in the cobweb phenomenon when they base their sowing decisions on prices witnessed in the previous marketing period,” the economic survey said.

It means if a farmer observes a higher price for a specific crop for a year, he would opt to produce more of it the next year. But if more of them think like him, production exceeds demand and price falls leading to another round of low productivity.

What’s happening now is an effect of high prices in 2015-16, making them sow less in 2018 leading to less supply. This was compounded by an unexpected demand spiked due vegetable crop destruction by heavy rains. Going by this theory, pulse prices could be benign in 2020.

Consumers however will be caught in a cycle more vicious than the farmers – rising prices and panic purchasing – that will stretch their household budgets.

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