Role of TOP Prices in India’s Inflation

Source-This post on Role of TOP Prices in India’s Inflation has been created based on the article “A vegetable triumvirate, inflation and the takeaway” published in “The Hindu” on 22 May 2024.

UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context– The article discusses the inflation concerns regarding three key vegetable products: Tomatoes, Onions, and Potatoes (TOP).

In the fiscal year 2023-24, vegetable prices in India rose sharply by around 15% compared to the previous year, showing considerable instability. Tomato prices rose sharply by 202% in July 2023, greatly affecting headline inflation, even though tomatoes make up only 0.6% of the CPI basket.

What is the significance of inflation in assessing the health of the economy?

Inflation serves as a crucial indicator of economic health, reflecting changes in general price levels and the cost of living.

In India, the Consumer Price Index (CPI) is used to measure price inflation. It mainly relies on Laspeyre’s price index to track changes in the cost of living.

The CPI basket comprises 299 items, with vegetables accounting for a weight of 6.04%.

What is the composition and significance of the “TOP” group within the CPI basket?

The “TOP” group holds a weightage of 2.2% in the overall CPI basket for the average Indian household.

TOP plays an important role in influencing food and beverages inflation as well as headline CPI figures.

According to the CPI basket classification, in urban areas, the TOP group makes up 3.6% of the total consumption basket, while in rural India, it accounts for 5% of the total consumption basket for the bottom 5% of consumption classes.

How is price volatility of TOP measured?

1) The coefficient of variation (CoV) serves as a key measure of inflation volatility.

2) The CoV of TOP inflation (5.2) is significantly higher than the volatility of the vegetables sub-group (3.0), the food group (0.6), and headline inflation (0.3).

3) The chart shows the volatile inflation trend for tomato, onion, and potato, ranging from -36.6% in September 2021 to 132.0% in December 2019.

Read more- Inflation in India- Reasons and Solutions

What are the reasons behind volatility in TOP prices?

1) Perishability-The perishable nature of TOP crops can lead to price fluctuations, as producers and traders adjust prices to manage inventory levels and avoid spoilage.

2) Farmers do not receive Minimum Support Prices (MSPs) for their produce and rely on private traders to sell them. Thus, there are no fixed prices for these crops, private traders buy them at low prices and sell them at high prices which leads to volatility in prices.

What should be the way forward?

1) There is a need for effective policy interventions and a nuanced understanding of agricultural supply chains.

2) Some potential solutions involve revamping agricultural supply chains, enhancing cold storage facilities, offering improved prices to farmers, and decreasing high input costs like fertilizers and pesticides.

3) The government should not resort to short-term measures like lifting export bans, rather it should address farmers’ demands for MSPs for onions.

Question for practice

What is the composition and significance of the “TOP” group within the CPI basket? What steps can be taken by the government to minimize volatility in the prices of “TOP” group?