Tomato, onion, and potato (TOP) prices have always been critical from India’s politico-economic perspective, as they are an indispensable part of various culinary preparations cutting across classes. Needless to say, TOP has become an essential ingredient of food preparation for the rich or the poor. Hence, policymakers must maintain the stability of TOP prices. From a social perspective, TOP is an essential component of the consumption basket of all households cutting across economic classes but higher consumer prices impact the purchasing power and savings of those at the bottom of the economic layer.
What is the economic impact of TOP prices? It impacts inflation numbers measured by the consumer price index (CPI). TOP together constituted about 9.67 percent of CPI weights. Let’s dive into events of the TOP price instability of the past and the CPI inflation numbers. A sharp rise in tomato prices increased the CPI by 0.2 percentage points during 2010. A severe drought in 2013 in Maharashtra impacted the onion crop in the critical growing belt, and the prices of onions doubled. The CPI inflation rate in India was further fuelled by the doubling of tomato prices, reaching the highest at 15.5 percent in November 2013, i.e., the highest in the last two decades. Late monsoon and pest attacks led to a decline in potato production in 2019, and the price of potatoes doubled. The CPI inflation rate in India increased to 14.2 percent in December 2019.
10% Of The CPI Basket
This shows that maintaining price stability is critical not only for keeping the vote bank intact but also for creating room to manage the fundamentals of the 90 percent of the CPI basket, while letting the economic growth momentum continue. While the TOP fundamentals can be controlled through policy measures, by moving the consumption up in the value chain, enhancing storage and supplies and market transparency, we must do so to control what is within our control. Of the 90 percent, Much of the price impact of many other components of the CPI basket such as edible oil and fuels may not be in the control of policy-making. Given climate change, extreme weather events are expected to join the list of factors impacting the supply of TOP, making it all the more important that we work on improving the fundamentals.
The first would be to augment supplies. The scope is limited by various factors, from access to quality inputs to finding the market to sell at prices with sufficient margins. When in surplus, we have the choice of storing it. While cold storage has become the norm for potatoes and onions, no one has real-time data on storage. These storages are private with no obligation to report the data compared with Warehousing Development and Regulatory Authority (WDRA)-accredited warehouses.
Moving Up The Value Chain
The other choice for policymaking is to move TOP up in the value chain by processing them into onion powder, fried onion, frozen potato snacks and frozen tomato preparations. Measures to enhance the adoption of processed TOP products and technology matching the consumption needs of the population is something on which there has yet to be much of a research focus. While incomes have increased, urbanisation is growing and more women have joined formal sectors, India's overall processed food sales are at a paltry 10 percent of total food sales compared with other developing countries such as Thailand and Brazil where it is 20 percent and 25 percent, respectively. If we were to solve the problem of TOP-induced inflationary pressures, policy needs to focus on promoting awareness about processed TOP products, incentivising investments in processing technologies, promoting research into processed TOP products that match the consumption pattern and making them available at affordable prices.
Moving TOP in the value chain will not only lead to demand planning but also signal growers and create the opportunity for contract farming to increase supplies. Further, processors of TOP with committed retail prices for a fairly longer period will cushion any price instability in the markets. Increased procurement by processors would result in better price realisation and hence stability in growing interests and inculcate quality culture among TOP growers. A healthy processing industry would also need a well-developed cold storage industry connecting them to the world of finance. This requires that there should be more WDRA-accredited cold storages or mandating TOP storage in WDRA-accredited storages with timelines.
The availability of real-time storage will bring transparency to storage and promote transparent price discovery. Further, electronic markets would need to cater to transactions in TOP aided by data collection on sowing, crop health, rainfall, and harvest, like other major crops. Collection and dissemination of this data will strengthen the price discovery process and make the supply chain efficient in reaching TOP to consumers.
Here is a point to ponder. As the local street vendor was offering tomatoes at Rs 120, our regular vendor who uses WhatsApp to ply his trade offered to supply tomatoes at Rs 90 per kg. Both would get tomatoes from the same wholesale market. One goes with the market retail prices, hence his profits. Our regular seller does not want to exploit the situation and still sell it with a reasonable margin and keep the buyers’ confidence intact.
V Shunmugam is Adjunct Faculty with National Institute of Securities Markets. Views are personal, and do not represent the stand of this publication.
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