Inflation may benefit people with flexible money incomes but not those whose money incomes are fixed.
Farmers have flexible money incomes. Therefore, theoretically at least, they should benefit from an unanticipated increase in the rate of inflation. Empirical studies however, have not found this connection, the NCAER study said.
As inflation increases, prices paid by farmers for various inputs increase faster than the prices they receive for their products, thereby the terms of trade for farmers deteriorate as the rate of inflation rises.
General inflation when accompanied by growth may be associated with a slight increase in the demand for farm output. However, increase is likely to be small due to the low-income elasticity of demand for farm output.
On the other hand, higher marketing margins due to imperfections in the agricultural markets, stirred up by higher wages and various other marketing costs, reduce the demand for farm output at the farm level, NCAER said.
These opposing forces suggest that the net impact of inflation in the national economy on prices received by farmers is small in comparison to the impact on prices paid.
Studies in the United States have observed that in the short run, a rise in input prices by 10 per cent reduced net income of farmers by 2.3 per cent in short run of 1-2 years and 1.2 per cent in the long run.
The impact of inflation on agriculture is multifaceted. Firstly, it raises the sector's costs of production through increased material input costs.
Secondly, higher production costs may be shifted to consumers, but this possibility is limited by the competitive imports, thus reducing farmers' rate of return, the NCAER study said.
The low current income from farming motivates farmers to seek higher support prices and to extend price support policies to more commodities. Such policies result in further higher prices and higher rates of inflation.
The high input prices lead farmers to take recourse to more credit, especially non-institutional credit for their farm operations which ultimately leads farmers into a debt-trap, the study said.
Policies towards agriculture, especially in an inflationary setting, must come to grips with trade-offs intensified by the phenomenon. Policies that may have beneficial effects in periods of stable prices quite frequently have overwhelming adverse side effects during inflationary periods impeding achievement of the original policy goals, it said.