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Food inflation is back to haunt you. After staying low in the June 2023 quarter, the hump in the September quarter (mainly due to higher vegetable and foodgrain inflation) and an uneven monsoon has changed India’s inflation narrative for this fiscal, said Crisil in a note.
Why? Vegetables have 15.5% weight in the food index, which is the highest after cereals and milk, and remains the most volatile component.
Tomatoes, onions and potatoes are the most consumed vegetables in India and make up more than a third of the CPI vegetables category. Hence, any sharp movement in their prices influences the movement in CPI vegetable inflation. Since these vegetables are essential and high-frequency-purchase items across rural and urban areas, a surge in their prices can distort household budgets; keep inflation expectations high; and dent purchasing power for discretionary items.
How Tomato-Onion-Potato ( Top) inflation has trended up, keeping vegetables inflation elevated
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As seen in the charts above, tomato-onion-potato ( TOP) inflation hit a peak of 132 per cent in December 2019, led by sky-high onion prices as unseasonal and prolonged rains led to poor onion harvest. In July 2023, TOP inflation shot up once again, this time to 52.6% due to tomato prices.
"Interestingly, the sharpest drop in vegetable production growth in recent years is seen in the TOP category. Over the past decade (fiscals 2014-2023), TOP production growth slowed to 3.4% from 8.9% in the preceding decade. For the remaining vegetables, production growth slackened at a slower pace of 2.2% from 5.3%," said Dipti Deshpande, Principal Economist at Crisil.
Such spikes are frequent in India
The last time it lasted in double digits for seven months was in fiscal 2020 such that the annual average vegetable inflation surged to 21.3 per cent, taking up average food inflation to 6.7 per cent. And back to double digits between March and September 2022, averaging 15 per cent.
The last time it lasted in double digits for seven months was in fiscal 2020 such that the annual average vegetable inflation surged to 21.3 per cent, taking up average food inflation to 6.7 per cent. And back to double digits between March and September 2022, averaging 15 per cent.
"The good news is vegetable price pressure has abated as inflation fell from its peak of 37.4% in July to 3.4% in September with fresh supplies entering the market. Prices of tomatoes (which was a major driving force) and of several other vegetables fell sharply by September. Onion prices, though, remain a pressure point. The not-so-good news is that vegetable prices can surge afresh," said Dharmakirti Joshi, Chief Economist at Crisil.
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What the data tells you:
Vegetable inflation has trended up in the past four years. CPI vegetable inflation averaged 5.7% during fiscal 2020 to 2023. It averaged 0% during fiscals 2016 to 2019, with interim periods of sharp deflation and steep inflation, mostly led by weather shocks. In comparison, average food inflation rose to 6.2% during fiscals 2020 to 2023 from 2.8% between fiscals 2016 and 2019.
Recent trends in vegetable inflation
The frequency of vegetable price spikes has increased. In the past 100 months, CPI vegetable inflation was above its period average of 3.8% in 49 months. It was above 7% in 35 months, above 10% in 30 months and above 20% in 13 months.
Volatility in vegetable inflation has increased: Measured by standard deviation, volatility in vegetable inflation, which was already high at 11.1 during fiscals 2016 to 2019, rose to 17.3 during fiscals 2020 to 2023. Food inflation volatility during the periods was much lower, at 2.9 and 3.4, respectively.
Crisil further explains what ails vegetables in India
High volatility in production and prices:
Both vegetable production and prices have been volatile, the latter exhibiting higher volatility driven by adverse weather events and demand-supply mismatches. Vegetables are grown throughout the year, are more vulnerable to weather shocks and pest attacks, and have no price signalling mechanism (such as minimum support price) or any assured offtake by the government. This is unlike cereals and pulses which are cultivated during two major cropping seasons and have more predictability regarding production and prices.
Supply-demand mismatches
Globally, India ranks high in the production of vegetables, second only to China. But while production has been high, growth has slowed in recent years and falls short — as government estimates suggest — of demand. Demand, on the other hand, is surging because of population growth and demographic transition, higher incomes and changing dietary preferences. For instance, for 2016-17, the estimated demand-supply gap was 4.2 million tonne — that is, actual supply was 2% short of estimated demand.
Slower production growth and stagnant yields:
Vegetable acreage and production have been rising in absolute terms, but the growth has slowed and yields have stagnated. After a surge in vegetable production in the 2000s, aided by government support through the National Horticulture Mission 2005-06, average per-year production growth dropped to 2.8% in the past decade (on 6.8% in the preceding one).
Yields have stagnated, led by a drop in yields of key crops such as tomato and onion (Chart 6). Moreover, yields in India remain much lower than the global levels. As per the Report on the Committee for Doubling Farmers’ Income (December 2017), India’s vegetable yield is 18 metric tonne per hectare, compared with 39.3 in Spain, 32.5 in the US, 27.3 in Italy and above 19 in Brazil and Mexico.
• Losses and wastages
Total losses on account of harvesting, packaging, transporting, storage and marketing remain significant and high, in the range of~4.9% to 11.6% for various vegetables. Such losses put further pressure on supply and availability of vegetables for final sale and consumption. Given the perishable nature, losses are higher for vegetables compared with foodgrains, with losses for tomato, onion and potato at 10.1%-13.1%, 7.1%-7.5% and 6.0%, respectively. That said, losses have reduced somewhat in recent years. A CRISIL study had estimated that for every 100 kgs of tomatoes produced, only 73 kgs reach the market and the rest is wasted. A good 67% of the wastage is avoidable, according to the study.
Low level of food processing also leads to substantial wastage
Less than 1% of tomatoes and only 6-7% of onions and potatoes produced in India are used for processing, far lower than global standards.
Less than 1% of tomatoes and only 6-7% of onions and potatoes produced in India are used for processing, far lower than global standards.
"At the farm stage, a large proportion of losses (besides harvest losses) occur while sorting and grading, suggesting a need to leverage technology and develop better infrastructure and monitoring systems at this stage," said Joshi.
Reasons for price volatility
Given the presence of a supply gap, weather shocks and pest attacks add to the price volatility in the short term. Vegetables are more susceptible to uneven weather compared with foodgrains, various studies indicate.
A study in the Economic and Political Weekly concludes that cyclones, followed by rain deficiency, have the maximum impact on vegetable prices. An April 2022 study by researchers at the Tata-Cornell Institute for Agriculture and Nutrition on tomato harvests in South India found 13.9% of the produce tended to suffer pre-harvest quality loss due to pest attack and disease, in addition to weather distress.
Farmers base their sowing decisions on price trends in the preceding season. A drop in prices in one season could therefore result in lower sowing and production shortages in the following season, leading to price spikes. "Take the recent case of tomatoes price spike. The crash in their prices a few months back would have discouraged farmers from growing it. This resulted in less sowing, which leads to a smaller harvest. And the adverse impact of weather and pests that followed hit tomato production hard and flared tomato prices in July-August," said Crisil.
Unfavourable risk-reward dynamics and price uncertainty also disincentivise vegetable growers.
Unfavourable risk-reward dynamics and price uncertainty also disincentivise vegetable growers.
What can the government do, according to Crisil:
- Adoption of hybrid varieties is said to potentially increase yields by 1.5-3 times, which would convert into higher income from the same cropped area.
- Polyhouse cultivation for tomatoes and perishable vegetables to ensure supply during adverse weather conditions.
- Private sector investment in research and development to create high-yielding, and climate- and disease-resistant crop/seed varieties.
- Providing access to cold storage facilities in vegetable-producing districts can help reduce spoilage and allow the government to store vegetables for times when supply is hit.
- Use of plastic crates for transportation instead of sacks can reduce losses
- Processing: processing. As per the ICRIER report, at least 10% of the produced tomatoes need to be processed into paste/puree to cater to demand where there is shortage of fresh produce. This is also applicable to ginger and garlic.
- Operation Greens, a project under the Ministry of Food Processing Industries, aims to stabilise supply of vegetables by the creation of farmgate infrastructure, development of agri-logistics, creation of storage capacity-linking consumption centres, and increasing food processing capabilities; these are long-term intervention measures. In the short term, by providing subsidy on transportation and hiring storage facilities for TOPs, the scheme aims to reduce post-harvest losses and protect growers from making distress sales.
