Inflation is a critical indicator of an economy’s health, reflecting the changes in the general price level and the cost of living. 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. Though vegetables have a weight of only 6% in the total CPI basket, their contribution to inflation was as high as about 30% in February and March 2024. Tomato prices soared by 202% in July 2023 and contributed to 18.1% of the total headline inflation despite the weight of tomatoes being only 0.6% in the CPI basket. 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 (chart). 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 (CoV=3.0), the food group (CoV=0.6) as well as the volatility of headline inflation (CoV=0.3). 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.
The chart shows the inflation trend for the three commodities, i.e., tomato, onion and potato, as well as for the constructed TOP group. The inflation rate for the TOP sub-group has remained quite volatile ranging from a minimum value of -36.6% in September 2021 to 132.0% in December 2019 (The writer’s calculation uses data from the National Statistical Office).
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.
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. The memorable Kisan Long March from Nashik to Mumbai in March 2023 and continuous protests by farmers have time and again raised the demand for Minimum Support Prices for onion. This demand seems to be continually ignored by the government.
Prachi Bansal is Assistant Professor, Jindal School of Government and Public Policy, O.P. Jindal Global University, Haryana. The views expressed are personal
