Headline retail inflation in India jumped to a 15-month high at 7.44% in July, riding on high vegetable prices, especially the tomato. The uneven monsoon rains across the country and the El Nino effect have further added to the uncertainty in the supply of cereals and vegetables in the months to come. On this ground, economists have predicted CPI inflation to be above 7% for the month of August as well.
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Soaring prices of vegetables are playing a critical role in the steep rise of India’s retail inflation. Riding on the back of flaring vegetable prices, retail inflation rose to a 42-month high in July 2023. Among the vegetables, retail inflation of tomatoes touched a 65-month high during the July month.
The stinging vegetable prices have alone steered the retail inflation up by more than 200 basis points (bps). Modest tomatoes turned red hot due to acute shortage and increasing prices. Interestingly, the highest vegetables-led surge in inflation, since 2012 was of about 388bps recorded in November 2013. The other upsurge was of 329bps registered in December 2019.
Where overall retail prices surged to 7.4% y-o-y, the vegetable prices have increased by 37.3% year-on-year, and by 38.1% month-on-month in July 2023. The price of tomatoes exotically surged by over 217% in the July month. Had vegetables not been part of the CPI (consumer price index) basket, the retail inflation figure would have been hovering around 5.4% instead of climbing up to 7.4%.
The table below shows the upsurge in prices of some vegetables during July 2023.
Table: Rise in vegetable prices (in July 2023)
Source: Centre for Monitoring Indian Economy (CMIE)
Of all the vegetables, potatoes, onions and tomatoes (POT) are the most significant vegetables. They are important as they are used in everyday cooking. These vegetables are also important because they tend to determine the ‘volatility’ in headline retail inflation. The year 2018 saw high inflation in potatoes while December 2019 and January 2020 witnessed scaling onion prices. As for the current year 2023, the soaring tomato inflation affected July month.
Among the POT group, tomatoes are relatively more sensitive to prices and eventually contribute to increasing volatility in retail inflation. Their input to inflation often exceeds their corresponding weight in the CPI basket.
Constituents of the retail inflation basket are assigned different weights based on their respective consumption levels. So, any constituent of the basket would contribute that much to the change in CPI as is its assigned weightage. Vegetables, as one of the constituents in the retail inflation basket, have 6% weight, while tomatoes (a sub-item within vegetables) carry 0.57% weightage.
Tomato prices experience considerable seasonal variation because of their highly perishable nature and short crop duration. The surge in tomato prices may also be caused due to crop damage from adverse weather conditions and pest attacks in major tomato-producing regions across the country. Tomato is grown in almost all the states in India, though in varying quantities. Major tomato-producing states are Andhra Pradesh, Madhya Pradesh, Karnataka, Gujarat, Odisha, West Bengal, Maharashtra, Chhattisgarh, Bihar, Telangana, Uttar Pradesh, Haryana and Tamil Nadu. (In the fiscal year 2021-22, the top 10 tomato-producing states accounted for over 79% of total tomato production in the country)
Food prices have been a key driver of retail inflation. The Consumer Food Price Index-based inflation rose by 696 basis points to 11.51% in July, from 4.55% in June. It stood at 6.69% in July 2022.
Cereals are the largest food component with about 10% weight in the CPI basket, and represent the basic staples of rice and wheat. Though the price of Cereals surged by 13% from the July 2022 levels, it was the vegetables with a 6% contribution to the CPI, that drove the inflation rate higher.
In its research study, RBI noted that seasonal increases in tomato prices are usually for a short period. The average duration of a price-upsurge event is about 2.6 fortnights. and that the price rise does not tend to continue beyond these seasonal spells. An article ‘State of the Economy’ in the Reserve Bank of India’s monthly bulletin said, “The vulnerability of the economy to the recurring incidence of vegetable price shocks, especially ahead of and during the monsoon, warrants major reforms in perishable supply chains covering transportation networks, warehousing and storage technologies, and value addition processes that damp the amplitude of these swings.”
The article highlights the surging retail inflation. It called for some major reforms in the supply chains of various perishable food products like vegetables, in view of the frequently recurring events of food-price shocks. Such reforms, the article said, shall raise efficiency and increase productivity while preserving the quality of the produce. The reforms will also provide a shield against food inflation emanating from varying climatic episodes. Subsequently, what would follow is steady prices for consumers, assured supplies, and lucrative returns for farmers in the country.
As for now, the government has undertaken various measures so as to limit further increases in food prices. The government is distributing tomatoes at discounted prices in major consumption centres. To curb retail inflation, it is organizing open market sales of rice and wheat through e-auctions and has even banned the export of non-basmati white rice.
Consumers can expect some relief from the high prices of tomatoes by early September as the new crop from Madhya Pradesh, Andhra Pradesh, Uttar Pradesh and Haryana will be reaching the market.
Although the government is persistently undertaking various steps to keep prices under control, economists are predicting CPI inflation to remain above 7% for August too. The uneven monsoon rains across the country and the El Nino effect are raising uncertainty over the supply of agricultural produce (mainly cereals & vegetables) in the coming months. So, as economists see, it may not be easy for RBI to align inflation close to the target of 4%.
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