Prices of pulses, which had been on a boil for long, worrying the government and consumers, have cooled this year. Overall food inflation fell to -0.9% in the first quarter (Q1) of fiscal 2018 from 7.3% a year ago. The steepest drop in the food basket has been in pulses, followed by vegetables. The latter slumped 230 basis points (bps) on-year to -13.1% in Q1, while pulses inflation is down 500 bps to -19%. However, with vegetables shedding some of the base effect-led relief, and given seasonal pressures, vegetable prices skyrocketed in July. Pulses inflation, however, continued to dip, substantiating our contention that the price of pulses surged every two-three years. Our study, 'Every third year, pulses catch price-fire-had highlighted this in November 2015.

Pulses follow what the economists refer to as the 'cobweb phenomenon', where output responds to prices with a lag. Production decisions, taken on the basis of prices experienced in the preceding period, create a cyclical pattern in pulses, which gets amplified by weather because these crops are largely rain-fed. This phenomenon can be attributed to a number of factors, including pricing policies, import policies, production decisions, and the weather. The cobweb pattern typically prevails when no price smoothing (or assuring) mechanisms are in place.

In fiscal 2017, bumper production and a sharp decline in prices did bring relief to the consumer, but not to the farmer. That's because input costs grew steadily, while output prices fell sharply, negating the benefit of higher production. Our analysis shows that falling prices had a detrimental effect on the profitability of growers. Profit margins for all pulses, except gram, fell an average 8% on-year in fiscal 2017.

The policy focus with regards to pulses, therefore, should not only be on improving production but also on price-smoothening measures. Increasing irrigation coverage and development of markets are long-term remedies. In the near term, however, efforts should focus on effective use of price stabilization fund and iron out of inefficiencies in the futures market.