Impact of Tomato, Onion, and Potato (TOP) on India's Inflation Dynamics

29-10-2024

In October 2024, RBI Governor has expressed concerns about lowering the repo rate, as inflation is still above the comfort level of 4%.

September inflation, measured by the Consumer Price Index (CPI), reached 5.5%, with food inflation exceeding 9.2%, impacting a large segment of the population.
Inflation is a key economic indicator that reflects changes in general price levels and impacts the cost of living.

How Food Inflation Affects Overall Inflation?

Consumer Price Index (CPI): The CPI tracks changes in the retail prices of goods and services consumed by a specific population group within a defined area, using a set base year for reference.

It provides insights into the cost of living and is released by the Ministry of Statistics and Programme Implementation (MoSPI).

High Weight of Food in CPI: Food inflation impacts overall inflation significantly due to the outdated weights of food items in the Consumer Price Index (CPI).
Basket of Goods and Services: This basket reflects the standard of living by capturing the utility consumers derive from their income, prices, and preferences. It forms the basis for calculating CPI.

Consumer Food Price Index (CFPI) Share in CPI: Food items form a significant part of the CPI, with the Consumer Food Price Index (CFPI) accounting for 39% of the CPI.
Share of Food and Beverages in CPI: This group, encompassing a broader range of food and drink items, constitutes 46% of the CPI, highlighting the significant role food costs play in overall inflation.

Impact of Key Vegetables (TOP): Tomatoes, onions, and potatoes—often referred to as TOP—represent 4.8% of the food and beverages group and 2.2% of the total CPI.

Due to their essential role in Indian diets, fluctuations in TOP prices directly affect the overall inflation rate.
The TOP group constitutes 3.6% of the total consumption basket in urban areas and 5% in rural India for the bottom 5% of the consumption classes.

Need for Weight Update: These weights are based on 2011-12 consumption data and they do not align with current spending habits.

The Household Consumption Expenditure Survey (HCES) 2022-23 suggests a 5-6 percentage point reduction in food weight, which could improve CPI accuracy in representing today’s consumption patterns.

Vegetable Inflation Surge: Vegetables like tomatoes, onions, and potatoes (TOP) have driven 63% of the recent food inflation.

In September 2024, year-on-year price rises for tomatoes (42.4%), onions (66.2%), and potatoes (65.3%) highlight structural issues in India’s agricultural supply chain.
The sharp price hikes in tomatoes, onions, and potatoes are primary contributors. All top 10 commodities contributing most to CPI inflation are vegetables.
Price Cycles of Tomatoes, Onions, and Potatoes:
- Tomatoes: Prices surged to Rs 60-80/kg due to delayed kharif arrivals (because of heavy rainfall) and crop losses from pest infestations in Karnataka.
- Onions: Retail prices rose to Rs 50-60/kg, with supply disruptions from storage loss and rain-damaged crops in Maharashtra and southern states.
- Potatoes: Prices went up as rabi crop stocks decreased, and fewer new potatoes arrived, adding to the impact of last year's low prices.

Operation Greens Program: It was launched in 2018 to stabilize prices of tomatoes, onions, and potatoes (TOP) but has been diluted to cover all fruits and vegetables, losing its targeted focus.

This dilution has led to frequent supply disruptions and post-harvest losses with with potatoes facing 18-26% losses, onions 25%, and tomatoes 11-12%.
It is being implemented by the Ministry of Food Processing Industries.

High Prices in Lean Seasons: Supply shortages push prices up.
Distress Prices in Peak Seasons: Bumper harvests often lead to oversupply and low prices.

Storage Challenges: Only rabi onions, grown from March to October, are storable over extended periods. This variety serves as a buffer during lean months but has limited capacity.
Regional Production Concentration: High dependency on specific regions increases vulnerability. Extreme weather events like heatwaves and floods in key areas can disrupt supply chains significantly.
Structural Challenges: Inefficiencies in the supply chain, such as delays in transportation and distribution, cause temporary shortages and price hikes.
Adverse Climate Conditions: Unseasonal rains, droughts, and extreme temperatures often lead to poor yields, impacting supply and causing price spikes.
Fluctuating Price Cycle: TOP crops exhibit a “cobweb model” price cycle, where short supply quickly raises prices due to their perishable nature.

RBI’s Record with Flexible Inflation Targeting (FIT): Since adopting the FIT framework, targeting a 4% inflation rate (+/- 2%), RBI data over 101 months shows:

Global and Domestic Disruptions: Inflation was kept below 4% from 2016 to 2019 due to low international prices and fiscal consolidation.

The COVID-19 pandemic and the Russia-Ukraine conflict in 2022 disrupted supply chains, driving up inflation.
Global Comparison: Despite these challenges, India’s inflation (4.4% in 2024) remains lower than the Emerging Market and Developing Economies (EMDE) average of 7.9%, per IMF data.

Outdated CPI Basket Weights: Food and beverages account for around 46% of the CPI basket which deflects inflation measurement. Updating these weights with recent consumption survey would provide a more accurate inflation picture.

Managing Agricultural Volatility: India's frequent price fluctuations in key crops like tomatoes, onions, and potatoes (TOP) require strong, focused policies.

Although Operation Greens was introduced in 2018 to stabilize vegetable prices, its expansion to cover all fruits and vegetables diluted its impact on essential crops. As a result, post-harvest losses remain high.

Short-Term Measures: Recent export duties on onions show a temporary approach. A more effective short-term solution is processing TOP crops during surplus seasons to reduce waste:

Long-Term Measures: Set up a dedicated agency with experts focused specifically on TOP crops. This approach would allow for specialized strategies in crop management, reducing the need for the RBI to adjust repo rates to control food inflation.