A vegetable triumvirate, inflation and the takeaway (GS Paper 3, Economy)
Context
Inflation is a critical indicator of an economy’s health, reflecting the changes in the general price level and the cost of living.
Measuring inflation
In India, the Consumer Price Index (CPI) is used to measure price inflation which is largely based on the Laspeyre’s price index and measures the economy’s cost of living.
The CPI basket comprises 299 items of which vegetables account for a weight of 6.04% in the total basket.
Within vegetables, the three vegetables — tomato, onion, and potato (TOP) — hold a weightage of 2.2% in the overall CPI basket for an average Indian household.
The significance of TOP goes beyond its numerical representation. These three commodities have historically played a pivotal role in influencing both food and beverages inflation as well as headline CPI figures.
One notable fact is that the TOP group constitutes 3.6% of the total consumption basket in urban areas while it constitutes 5% of the total consumption basket in rural India for the bottom 5% of the consumption classes, respectively, as per the CPI basket classification.
In FY2023-24, vegetable prices in India soared by about 15% (year-on-year). Vegetable prices have exhibited significant volatility, shifting dramatically from a fall of 0.7% in June to a substantial rise of 37.4% in July.
During the same month, the contribution of vegetables to headline inflation was a high 31.9%, and of TOP was 17.2%.
Price volatility
One of the striking features of TOP is its price volatility.
The coefficient of variation (CoV) of inflation is a key measure of volatility.
The inflation volatility of TOP has been measured using the coefficient of variation (CoV) for the period January 2015 to March 2024, yielding a value of 5.2.
It is significantly higher than the volatility of the vegetables sub-group the food group as well as the volatility of headline inflation.
This exercise reveals that TOP’s CoV surpasses not only the food and headline group but also the vegetables sub-group.
This heightened volatility underscores the sensitivity of these commodities to market forces, weather fluctuations, and supply chain dynamics.
Aiding the farmer
The volatility and importance of TOP in shaping inflation trends highlight the need for effective policy interventions and a nuanced understanding of agricultural supply chains.
These are perishable crops and are subject to a number of biotic and abiotic stresses.
As these crops do not have Minimum Support Price and are mostly sold to private traders by farmers, this volatility in prices also hurts farmers, the majority of whom are net buyers of these crops.
The possible solutions to reduce the volatility of inflation for these crops include an overhauling of agricultural value chains and improvement in the cold storage facilities, better prices for farmers to incentivise the production of the crops, and increased profitability in the cultivation that can be achieved by reducing the exorbitantly high input prices of fertilizers and pesticides used in the production of these crops.
Conclusion
The abrupt changes in lifting the export bans on onion ahead of the Maharashtra elections also show that we are still using short-term measures to deal with the price volatility in these crops as against measures that are demanded by the farmers.
