Volatility in Tomato, Onion and Potato (TOP) prices and its implications for India – Explained, pointwise 

Introduction  

Addressing price volatility in the Tomato, Onion, and Potato (TOP) commodities has become a pressing issue in India. These essential food items experience significant price fluctuations throughout the year due to factors like climate change, monsoons, pest attacks, and supply-demand dynamics. This instability not only has a substantial impact on the country’s Consumer Price Index, contributing to inflation, but also affects the livelihoods of farmers and affordability for consumers. Coupled with the imminent threat of El Nino and inadequate cold storage infrastructure, the challenge compounds further. As these fluctuations ripple through India’s economy and society, managing TOP price volatility has become a crucial task for policymakers. 

What are the reasons for volatility in Tomato, Onion, and Potato (TOP) prices?   

Seasonality: TOP crops have distinct harvest seasons, which can create price fluctuations based on the availability of the crops. For example, potato crops witness an increase in price volatility between November to January as prices go up in October-November and then decline in December-January as new crops arrive at the market. Similarly, onions prices being lower during April–May and higher during September–November. 

Regional concentration of production: Most of the TOP production is concentrated in a few states. Onion, for instance, is mainly sourced from Maharashtra, Madhya Pradesh, and Karnataka. Any changes in production, market dynamics, or weather events in these regions can drastically affect prices across the country. 

Production cycle uncertainty: Negative uncertainty regarding crop yield or damage due to weather events, pests, or diseases can result in significant price volatility. For instance, any damage to the Kharif onion crop due to an uncertain monsoon increases the burden of supply on the stored Rabi crop, causing price spikes. 

Perishability and storage constraints: The perishable nature of these vegetables, particularly tomatoes, contributes to their price volatility. Limited storage capacities and inadequate infrastructure also exacerbate price fluctuations. 

Demand inelasticity: Demand for onions, for example, is price inelastic, meaning that even a minor shortfall in production can lead to significant price increases. 

What are the effects of volatility in Tomato, Onion, and Potato (TOP) prices on farmers and consumers?   

Impacts on farmers: 

Uncertain income: High volatility in prices leads to uncertainty in income for farmers. If prices fall drastically after harvest, they may incur losses despite a good yield. This can discourage farmers from planting these crops in the subsequent season, causing supply shortages and even higher price volatility. For example, the rate of table potatoes has crashed between 60 to 76 per cent this year. Against the wholesale price of Rs 10 per kg last year, farmers in Punjab were struggling to get even Rs 4 per kg this year. 

Cyclical phenomenon: The price-production cobweb phenomenon exemplified by tomatoes highlights the challenges farmers face. For instance, low price realization in 2021 led farmers to plant less area under tomatoes and shift towards other crops like soy, cotton, and corn. This resulted in supply shortages and higher prices in the following months, showing the cyclical impact of price volatility on farmers’ decisions and their income. 

Increased vulnerability: Farmers are left vulnerable to the whims of the market and weather conditions. This uncertainty can lead to distress, especially among small and marginal farmers who have limited capacity to absorb financial shocks. Like, due to abundant production, onion prices crashed and farmers in Maharashtra have either been compelled to sell the onions at Rs 1 per kg or throw them on roads. 

Impacts on consumers: 

Budgeting difficulties: Price volatility of TOP commodities makes budgeting difficult for consumers, especially those in lower-income brackets. Sudden price hikes can put significant strain on household budgets. 

Inflation: Despite their relatively low weightage in the overall index, the substantial contribution of TOP to overall CPI in certain months can negatively affect the financial stability of farmers. For example, the weightage of vegetables in the overall index is only 6.04 with the weightage of TOP being 2.20. Even with such a low weightage, the contribution of TOP to the overall CPI has been higher in many months and in negative territory in some months. The share of TOP in CPI was 29% in the month of January 2020 and -18% in the month of September 2021” 

Access and affordability: During periods of high prices, access to these staple food items can become a problem for the poorer sections of society. Even with temporary price relief measures, some consumers may find it hard to afford these essential commodities. 

Impact on other commodity prices: High inflation in TOP prices can impact other commodity prices. For example, high potato prices might impact the prices of snacks or processed foods that use potatoes as a primary ingredient. This can lead to a broader inflationary trend, affecting the prices of multiple goods in the consumer basket beyond just the TOP commodities. 

Global implications: Fluctuations in the prices of TOP can have an impact on global markets as well. India is one of the largest producers and consumers of these commodities. So, when prices rise domestically, it can create supply gaps internationally. For example, during periods of high onion prices in India, countries that rely on Indian exports like Bangladesh, UAE, Nepal, Netherlands, UK could experience price hikes and supply shortages. 

What are the initiatives taken by the government to address volatility in Tomato, Onion, and Potato (TOP) prices?   

Operation Greens (OG): The Ministry of Food Processing Industries provides a transportation and storage subsidy of 50% for notified fruits and vegetables (including TOP crops) during periods of excess supply in the harvest season. This scheme helps reduce waste, manage supply, and stabilize prices. 

Market Intelligence and Early Warning System (MIEWS): Through the MIEWS portal, the government tracks and monitors the price movements of TOP commodities. This information enables the government to take quick actions in response to potential market disruptions. 

National Agriculture Cooperative Marketing Federation of India (NAFED): NAFED assists in controlling price volatility by gathering, analyzing, and circulating information about the supply, demand, and pricing of agricultural produce. 

Export Bans: When the domestic prices of TOP commodities rise significantly due to shortages, the government often puts a temporary ban on their exports. This is done to prevent a domestic supply crunch and to curb further price increases. This move ensures that domestic consumers have access to these commodities at affordable prices. 

What should be done to address volatility in Tomato, Onion, and Potato (TOP) prices?

Buffer stocking and cold storage facilities: There needs to be more investment in storage facilities to maintain a buffer stock of TOP, particularly potatoes and onions, which can be stored effectively. However, this approach might be less effective for tomatoes due to their shorter shelf life. 

Frequent government imposition of stocking limits on traders under the Essential Commodities Act may discourage private investment in cold storages. Therefore, this Act should be reconsidered, or at least applied more judiciously, to ensure that traders can maintain buffer stocks without fear of sudden regulatory shifts. 

Increase processing capacities: With storage posing a challenge for certain vegetables like tomatoes, it’s important to increase processing capacities. This means transforming raw products into more easily storable forms like purees, powders, or dehydrated pieces. The government should consider reducing the GST for these processed products to encourage their use and make them more affordable. 

To promote the use of these processed goods, the government should partner with industry organizations to conduct awareness campaigns, like those done for other processed foods. 

Encourage direct buying and contract farming: The government can promote direct buying by organized retailers from farmer producer organizations (FPOs) through contract farming, bypassing the traditional mandi system. This can help increase the share of the consumer’s rupee going to the farmers, much like in the case of the dairy industry. 

Reform Agricultural Produce Market Committee (APMC) mandis: There is a need for significant reform in the APMC mandis. They suffer from infrastructure deficiencies and need an overhaul. The government can undertake these reforms in a public-private partnership model, reducing commissions, encouraging contract farming, and setting up private mandis for better efficiency. 

Sources: The Times of India (Article 1, Article 2), Indian Express (Article1, Article2),  India Today, The Economic Times, Financial Express, The Hindu, NABARD, APEDA 

Syllabus: GS 3: Economic development – marketing of agricultural produce and issues and related constraints.