High vegetable inflation makes it hard for the RBI to lower interest rates

Source: The post high vegetable inflation makes it hard for the RBI to lower interest rates has been created, based on the article “TOP crops, price volatility and RBI” published in “Indian Express” on 28th October 2024

UPSC Syllabus Topic: GS Paper 3-Indian Economy-Inflation

Context: The article explains that high vegetable inflation, especially from tomatoes, onions, and potatoes, makes it hard for the RBI to lower interest rates. Structural issues in agriculture, outdated food weights in inflation calculations, and poor supply chains worsen the problem.

For detailed information on India’s food inflation read this article here

Why is the RBI not reducing repo rates?

1. The RBI is hesitant to reduce repo rates due to high inflation, which remains above the comfortable level of 4%.
2. In September, Consumer Price Index (CPI) inflation reached 5.5%, with food inflation climbing above 9.2%.
3. This is primarily due to rising vegetable prices, particularly tomatoes, onions, and potatoes (TOP), which have impacted the CPI significantly.

For detailed information on Factors influence the RBI’s decision on rate cuts read this article here

How does food inflation affect overall inflation?

1. Food inflation drives overall inflation due to outdated weights assigned to food in the CPI basket. 2. Food and beverages make up 45.9% of the CPI, with food alone accounting for 39%.
2. These weights, based on 2011-12 data, need updating to reflect current consumption. The 2022-23 survey suggests a 5-6 percentage point reduction, which could help better represent today’s spending patterns.

What factors are driving high vegetable prices?

1. Vegetable inflation reached 36% in September, contributing 42.8% to overall CPI inflation. The prices of tomatoes, onions, and potatoes surged dramatically, driven by:

Tomatoes: Price increases of 42.4% due to crop delays from heavy rains and white fly infestations in Karnataka, impacting key production areas.

Onions: Prices rose by 66.2%, with storage losses reported in Maharashtra and delayed crop arrivals due to rain.

Potatoes: Increased prices by 65.3%, as stored rabi crops began perishing in October.

2. Operation Greens, initiated in 2018 to stabilize prices of TOP vegetables, has been diluted to include all fruits and vegetables, losing its focus. This has led to ongoing supply disruptions and post-harvest losses, with potatoes facing 18-26% losses, onions 25%, and tomatoes 11.6%.

For detailed information on Extension of Operation Greens from TOP to Total read this article here

What should be done?

1. Short-term measures, such as the 40% export duty on onions, address immediate consumer concerns but don’t solve the root issue. For lasting stability, policies suggest processing surplus vegetables into products like tomato paste, onion flakes, and dehydrated potatoes to reduce wastage and boost income for farmers. Examples include Jain Irrigation’s onion dehydration efforts with farmers.
2. The RBI cannot manage food inflation through repo rates alone, as it lacks authority over agricultural policies. So there is a need for a dedicated agency to manage the supply and pricing of tomatoes, onions, and potatoes effectively.

Question for practice:

Discuss the impact of outdated CPI food weights and high vegetable prices on the RBI’s ability to reduce repo rates.