How tomato price spikes impact India's food inflation

High prices of tomato have been a cause for concern for the RBI since spillovers from tomato price spikes to prices of other commodities may put inflation at risk

By Nasrin Sultana

Published: Jul 19, 2023 05:38:46 PM IST

Updated: Jul 19, 2023 05:54:57 PM IST

Spillovers from tomato price spikes to prices of other commodities and unhinging inflation expectations remain a major concern. Image: Debarchan Chatterjee/NurPhoto via Getty Images

Steady increases in the price of the humble tomato have not only punched a hole in household budgets but may even cause a headache for the Reserve Bank of India as it tries to keep a leash on inflation. The central bank remains worried that the steep price spike of tomato prices have spilled over to other items causing inflation volatility.

“Spillovers from tomato price spikes to prices of other commodities and unhinging inflation expectations remain a major concern. Increasing amplitudes of price spells over the years calls for improving the supply chains to contain overall inflation volatility,” RBI says in its monthly July bulletin.

Typically tomato prices have been an important contributor to volatility in overall inflation, as its price volatility also gets transmitted to prices of other vegetables in both retail and wholesale markets. As the tomato is a highly perishable item with a very short crop duration, it shows seasonal variation in prices but these episodes are short-lived, RBI says.

According to RBI analysis, the average duration of a high price episode derived shows that prices stay above Rs 40 a kilogram for an average duration of 2.6 fortnights whereas prices remain below Rs 20 for an average duration of 10 fortnights or roughly five months. Similarly, prices of a kilogram of tomato remain in the range Rs 20-40 for 4.76 fortnights, based on the Markov Chain transition probability matrix. Markov Chain transition probability matrix indicates the probabilities of transitioning from one state to another in a single time unit.

“Multiple crop cycles with varying time spans across locations lead to more than one spell of price spike within the same year. While the yearly peaks have exhibited a general increase, the troughs have remained largely constant, indicating that prices do not ratchet up across spells,” RBI says.

However, RBI estimates show that even though margins (the wedge between wholesale and retail prices) respond to shocks, their elasticity to wholesale prices is low—for a one percent rise in wholesale prices, the wedge increases by 0.1 percent. Thus margins act as a shock absorbing mechanism and, therefore, inflation in retail prices is less volatile than wholesale, RBI explains.

But the worry is far from over.

Also read: 82% of Indian households not availing of government subsidies for tomatoes: Report

Food price inflation: Basket getting expensive

According to Radhika Rao, senior economist, DBS Group Research, this year, inflation is at risk in certain pockets including perishables (vegetables), pulses and foodgrains.

In India, retail-based inflation in June was at the higher end of expectations, rising 4.8 percent year-on-year compared to 4.3 percent in May, as the food component punched well above its weight. Food accelerated 2.2 percent month-on-month, driven by vegetables (up 12 percent MoM), eggs (up 5.5 percent), meat and other protein sources.

Rao points out that besides perishable-driven inflation, foodgrains also call for attention, particularly rice which is more vulnerable to intensity of the rainfall. “There is speculation that most rice exports (all non-Basmati rice) might be banned, which will be in addition to a previous restriction on broken rice imposed last year. The proposed ban, if implemented, is intended to secure domestic supplies, and keep prices in check in the midst of uncertain weather conditions,” Rao explains.

July and August are crucial months, as instances of uneven rainfall could disrupt local sowing and subsequently, final output of the water-intensive crop. A delayed catch-up in rains in the key rice-producing states will also prove to be insufficient to make up for lost yield. Rice inflation has already accelerated from average 6 percent YoY last year to nearly 12 percent in June 2023. Meanwhile global benchmark prices have jumped as regional governments are building up inventories in anticipation of El Nino-related disruptions.

Overall, monsoon rainfall is slightly above normal levels in the week ending July 19, but an uneven distribution of rains has led to floods. However, kharif sowing is still lagging compared to last year, especially for crops like rice, pulses and cotton. The area sown for kharif crops through July 7 was 42.16mn hectares, 5.4 percent below the corresponding period of 2022 which was at 44.59mn ha, shows analysis by Barclays. Rice and pulses sowing is lagging, largely due to low rains in the major producer states like West Bengal (for rice) and Maharashtra and Karnataka (for pulses). Sowing in coarse cereals is up in annual basis due to early rains in Rajasthan.

Staple vegetable prices are climbing with the seasonal buoyancy in this part of the year magnified by the supply shortfall. “A 3 percent month-on-month increase in food inflation in July versus 2.2 percent in June, along with dissipating base effects, could push headline inflation towards 5.8-6.0 percent in the third quarter of 2023. At the same time, prices also tend to correct sharply in perishables, especially vegetables, helped by short crop cycles and redistribution of existing supplies,” Rao adds.

Others concur. Tanvee Gupta Jain, economist, UBS, expects sustained upside risk to food inflation over the coming months partly on seasonality in vegetable prices (especially tomatoes and onions) and the likelihood of the supply/demand imbalance persisting in the case of wheat, pulses and milk.

While Jain estimates average headline retail inflation to move higher towards 5-5.5 percent YoY range in the September quarter from 4.6 percent YoY in June quarter as weather-related risks leading to higher food prices play out, she maintains that RBI will keep rates on hold in the August policy review and retain its hawkish tone taking into account these supply-side shocks.

Also read: Makers of tomato purees are keeping up with the skyrocketing demand. For now

What about the TOP?

Economists’ estimates show that usually it is the combination of tomato-potato-onion (TOP) prices which move in tandem and price volatility in these three key items impact food inflation.

With a weightage of 0.57 percent in the consumer price index (CPI) or retail basket, pricing pressures in tomato are unlikely to substantially impact the headline inflation unless prices of other two main crops (potato and onion) move in tandem, explains Hitesh Suvarna, analyst, JM Financial Institutional Services.

“However, supply side interventions are needed to ease the inflationary pressures. Unlike domestic inflation print, FOA index indicates moderation in global food prices across categories. Rapid progress in monsoon to surplus bodes well for the kharif sowing. We believe RBI is unlikely to put its credibility at stake with a premature policy decision,” says Suvarna. The FAO Food Price Index (FFPI) is a measure of the monthly change in international prices of a basket of food commodities.

On sequential basis, the average retail price of tomato went up by 38.5 percent in June. On wholesale basis as well, tomato prices rose by 45.3 percent in the same period. Tomato has a weightage of 0.57 percent in the CPI basket while TOP collectively forms 2.2 percent of the CPI basket.

According to analysis by Dipanwita Mazumdar, economist, Bank of Baroda, tomato inflation series in CPI shows that unanticipated price shock has resulted in an upswing in vegetable inflation. “Further the tomato price spiral is visible in months such as June, September and November; hence there is a seasonal trend in tandem with the harvesting and arrival of the vegetable. The cycles of price increase are also short-lived not exceeding 4-5 months generally. Hence what comes as a comfort in this case is that the current upswing may soon see a reversal,” Mazumdar adds.

As per Department of Consumer Affairs data, the average retail price of tomato in June was at Rs 32.6 per kg, whereas wholesale price was at Rs 24.9 per kg. Thus the gap between the two prices in June translates to Rs 7.7 per kg, higher than the long-term gap of Rs 7.2 per kg. However, ever since the prices started rising from mid-June it has widened significantly to reach Rs 12.5 per kg on June 30. Retail prices were at around Rs 25 per kg on June 11 and then crossed Rs 30 per kg on June 16. The Rs 40 mark was crossed on June 26 and Rs 50 on June 29. The gap went past Rs 10 per kg on 27th and then peaked on June 30.”

Quite clearly the margins being charged at the retail end have increased continuously, Mazumdar says. She sees correction in tomato prices in the second half of financial year 2024 when the harvest of July-November hits the market.