Demand-supply mismatch causing frequent bouts of vegetable inflation
The September 2023 quarter is witnessing a resurgence of foodinflation, caused by higher vegetable prices and an uneven monsoon, says a Crisil report.
Vegetable inflation has been trending up, with more frequent spikes in recent years mainly driven by a supply-demand mismatch. “Population growth and demographic transition, income growth, and the accompanying change in dietary preferences that come with it are some structural factors behind the surge in demand. While vegetable production — including per capita production — has grown, it has not kept pace with the surge in demand,” said the report.
Rise in frequency
Consumer Price Index (CPI) vegetables inflation averaged 5.7 per cent during fiscals 2020 to 2023. It averaged 0 per cent during fiscals 2016 to 2019, with interim periods of sharp deflation and steep inflation, mostly led by weather shocks. The frequency of vegetable price spikes has increased. In the past 100 months, CPI vegetable inflation was above its period average of 3.8 per cent in 49 months.
Inflation volatility affects consumers and farmers alike and policymakers to deviate in the short term, forcing frequent and repeated price-smoothening measures.
Apart from losses due to weather vagaries and pest attacks, post-harvest wastages during storage and transportation further brought down the stock available in the market. “Unfavourable risk-reward dynamics and price uncertainty also disincentivise vegetable growers,” the report said.
Vegetables have a 15.5 per cent weight in the food index, the highest after cereals and milk, and remain the most volatile component. Moreover, such spikes are frequent in India. “The last occasion when it lasted long (in double digits for seven months) was in financial year 2020. During that period, the annual average vegetable inflation surged to 21.3 per cent, pushing the average food inflation to 6.7 per cent. It returned to double digits between March and September 2022, averaging 15 per cent,” the study said.
However, the report said there are positives, especially with the vegetable price pressure abating as inflation fell from its peak of 37.4 per cent in July to 3.4 per cent in September with fresh supplies entering the market.
Production lags
The report said in terms of vegetable production, India ranks high, second only to China. But while the production has been high, growth has eased in recent years falling short of demand, according to government estimates. However, the demand has been growing steadily simultaneously.
While vegetable acreage and production have been rising in absolute terms, the yields have stagnated, led by a drop in yields of key crops such as tomato and onion.
TOP prices
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 TOP prices influences the movement in CPI vegetables inflation. For instance, during fiscals 2020-23, vegetable inflation surged to 5.7 per cent from nil in the preceding four fiscals, driven by a sharp rise in TOP inflation to 9.1 per cent (Chart 10). A steady rise in TOP inflation has kept vegetable inflation high over time. According to the report, volatility in TOP inflation remains significantly high, and much above the overall vegetables category.
Wastages
Total losses on account of harvesting, packaging, transporting, storage and marketing remain significant and high, in the range of 4.9-11.6 per cent for various vegetables as per the NABCONS study in 2022. Such losses put further pressure on the supply and availability of vegetables for final sale and consumption.
At the farm stage, a large proportion of losses (besides harvest losses) occur while sorting and grading, pointing to a need for technological development and better infrastructure and monitoring systems. “The data shows some reduction in losses though they remain high. In potatoes, for instance, increased cold storage could have potentially driven down some losses. This underscores the importance of technological interventions and infrastructure improvements to mitigate losses. This could increase vegetable supply, reducing the shortfall with respect to demand, thus mitigating spikes in inflation,” the study said.
Policy imperatives
The report calls for better efficiency in vegetable production to enhance profitability and cut down risks. It recommends adopting a hybrid technology that can revolutionise the production of vegetable crops. Backed by government incentives, there is also scope for private sector investment in research and development to create high-yielding, and climate- and disease-resistant crop/seed varieties.
It also suggests improving post-harvest infrastructure to reduce losses. “Improving the efficiency of supply chains can reduce losses that occur during cold storage, transportation, and marketing. Significantly increasing food processing to meet demand during supply glut can also cut post-harvest losses. Reducing losses during key stages such as sorting/grading and transport is also critical,” the report concludes.