A Vegetable Triumvirate, Inflation, and the Takeaway

The inflationary trends in India, particularly influenced by the prices of vegetables like tomato, onion, and potato (TOP), have significant implications for the economy. These commodities, despite their relatively small weight in the Consumer Price Index (CPI), play a critical role in shaping inflation trends due to their price volatility.

The Impact of TOP on Inflation

1. Significance of TOP in CPI: Within the CPI basket, vegetables hold a weight of 6.04%, with TOP accounting for 2.2%. These commodities have historically influenced food and beverage inflation as well as headline CPI figures.
2. Price Surge and Contribution to Inflation: In FY2023-24, vegetable prices soared by about 15% year-on-year. For instance, tomato prices increased by 202% in July 2023, contributing to 18.1% of the total headline inflation, despite tomatoes holding only a 0.6% weight in the CPI basket.
3. Urban vs. Rural Impact: TOP's significance varies across demographics, constituting 3.6% of the urban consumption basket and 5% in rural areas for the bottom 5% consumption class, reflecting a substantial impact on inflation for different population segments.

Price Volatility and Its Implications

1. Volatility Metrics: The coefficient of variation (CoV) for TOP inflation is 5.2, significantly higher than the vegetables sub-group (CoV=3.0), the food group (CoV=0.6), and headline inflation (CoV=0.3). This indicates a high sensitivity to market dynamics, weather fluctuations, and supply chain issues.
2. Inflation Trends: The inflation rate for the TOP sub-group has shown extreme volatility, ranging from -36.6% in September 2021 to 132.0% in December 2019, underscoring the unpredictable nature of these commodities.
3. Impact on Farmers: The volatility in TOP prices affects farmers adversely as they do not benefit from Minimum Support Price (MSP) and often sell to private traders. This market instability can result in significant income fluctuations for farmers.

Policy Recommendations and Farmer Support

1. Overhauling Agricultural Value Chains: Improving cold storage facilities, streamlining agricultural value chains, and reducing input costs for fertilizers and pesticides can help stabilize prices and benefit farmers.
2. Policy Interventions: There is a need for long-term measures rather than short-term fixes like abrupt export bans. Policies should focus on sustainable solutions that address the root causes of price volatility.
3. Minimum Support Price (MSP) for TOP: Farmers have consistently demanded MSP for onion and other TOP crops to ensure stable incomes. Recognizing and addressing these demands through policy adjustments can provide much-needed support to the agricultural sector.

UPSC Mains Questions

Q. Evaluate the role of the Consumer Price Index (CPI) in reflecting the cost of living in India. What policy measures can be adopted to mitigate this volatility?