Food Inflation: Is It Only About Weather?
Sanjay Roy
ONCE again, working people feel the heat of rise in vegetable, rice and pulses price and an increase in CPI general index in June 2023. The inflation rate is a general increase in prices, moderated since November 2022 after long episodes of high inflation. As we know that core inflation which excludes commodities such as food, fuel and light, that generally show high fluctuations in prices, remained stable after falling sharply in April-May 2023. But food inflation always has higher impact on the poor and the working people at large as the share of food is higher in their consumption expenditure. As income increases, share of consumption expenditure on food declines and wealthier people spend very little share of consumption on food. Hence they are relatively less affected by food inflation.
The CPI general index has increased to 4.81 per cent and for urban areas it stood at 4.96 per cent in June 2023. The general increase in consumer price index is caused by the rise in food prices and prices of miscellaneous goods. Food and beverage inflation has touched 4.63 per cent in June 2023 and for miscellaneous goods it is 5.19 per cent. Considering only food, inflation rate for the month June 2023 is 4.49 per cent which is much higher than the inflation rate of 2.96 per cent recorded in May 2023. Compared to the previous month therefore inflation of food has increased by 153 basis points and CPI general index has increased by 50 basis points. It is found that tomatoes, onion and potatoes although account for a small share of 2.20 per cent of the average consumption basket, nevertheless, high volatility of prices of these items influence the consumer price index adversely.
HIGH VEGETABLE PRICES
Food price increase hurts disproportionately the poor and the middle class. The share of food and beverage in an average consumption basket is about 40 per cent. In urban areas, this average is 29.6 per cent and in rural areas this share is higher at 47.25 per cent. But if we take only food and see their share in average consumption basket by consumption classes, the share of food for the poor turns out to be close to 73 per cent while for the rich it is about 43 per cent according to estimations done on the basis of NSSO. For the classes in between or the middle segment, food comprises of 69-70 per cent of the monthly consumption expenditure. This simply means people who have a larger share of food in their consumption basket are more affected by food inflation than other classes of people.
Within the food group the prices of fruits, vegetables and pulses have increased in the recent episode. Price of rice is on the rise and vegetables particularly tomato, brinjal, potato, onions and green chillies show huge increase in prices. It needs mention that although wheat prices moderated from its steep rise in April 2023 and cereal substitutes also show lower inflation rate but price of rice and rice related products have increased in the recent period. In the pulses group, the high price of tur dal has contributed to the rise in inflation. On a monthly basis comparison, potato, radish, cauliflower, ginger and garlic recorded higher inflation since May 2023 which continued in June. In case of tomato, on a monthly basis comparison, the inflation rate was 2.20 per cent in May 2023 which shot up to 64.46 per cent in June 2023. The brinjal prices also show a sharp rise recording a monthly basis inflation rate of 4.14 per cent in May 2023 that increased to 12.33 per cent in June 2023. Average tomato price for the larger part of June was Rs 20 per kg which in the last week of June shot up to 50 per kg. Around July 15 the average prices further increased to Rs 116.86 per kg with maximum reaching to Rs 250 per kg in some places.
The high increase in tomato prices need to be seen in the backdrop of some seasonal as well as structural factors. Notable is the fact that tomato prices were as low as Rs 2-3 per kg in 2021 and there has been a decline in the overall production of tomato in the recent years as a result of such low return. The rabi crop was hugely affected due to delayed monsoon in south of India and Maharashtra and low quality tomatoes fetched a very low price. During the next crop also there was rain which affected the crop and also led to high transportation costs. Many farmers as studies suggest have shifted from tomato cultivation to other vegetables as a result. And between the two crops the supply shortage became acute leading to skyrocketing of tomato prices. Hence there is no institutional mechanism to ease out the fluctuations in production as well as return to the farmers.
INSTITUTIONAL FAILURE
Prices of agricultural products tend to be volatile compared to other goods and services primarily because of unanticipated changes in weather that adversely affect agricultural production. Past prices also influence current cultivation of crops as farmers try to optimise according to anticipated prices and hence supply is adjusted accordingly. Moderating the fluctuations of supply incurs huge cost particularly for perishable agricultural products which cannot be borne individually by the farmers. In the absence of requisite infrastructure for preserving the crop produced, there can be episodes of excess supply leading to a drastic fall in prices. On the other hand, if the produce is affected due to adverse weather conditions prices tend to rise due to supply shortage. The actual producers, the small farmers however are not able to take advantage of the high price because they are unable to hold the product and wait for long till the price reaches its peak since they have to sell their produce, realise their investment and utilise it for the next crop cycle. It is the merchants, intermediaries and hoarders who take advantage of a shortage in supply. A study shows that farmer’s share is only 32 per cent of the price paid by the final consumer.
In many cases, to avoid fluctuations in realisation of prices, small farmers enter into forward contracts with merchants and in such cases it is the merchants who are the prime gainers of price volatility as they have big pockets to withstand unusual fall in prices for few episodes while making windfall gains during skyrocketing of prices. Therefore the fluctuations of prices of agricultural products is not only because of unusual rain and heat wave in different parts of India but also a manifestation of the sheer absence of necessary infrastructure and policies that protect farmers from weather driven crop loss and offer adequate network of marketing and preserving agricultural produce. Providing crop insurance, developing integrated value chains that link small producers to processing industry, building infrastructure and access to cold storages and cold transportation accessible to farmers can prevent unusual fluctuations in production and consequent price volatility. The absence of these infrastructure under government control creates the market for agribusiness corporates, enhances the power of the middlemen who make windfall gains while both the consumer and the producer are adversely affected by the enormous increase in prices.
