RBI Governor Shaktikanta Das categorically acknowledged within the minutes of the final Financial Coverage Committee assembly that it’s dangerous to cut back the repo charge as inflation remains to be not at a snug degree of 4 per cent. September inflation, measured by the Shopper Worth Index, surged to five.5 per cent, whereas meals inflation, affecting the most important inhabitants phase, crossed 9.2 per cent. Therefore, RBI’s uneasiness in committing to cut back the repo charge is comprehensible.
An even bigger query is how far can the RBI actually tame inflation, particularly when it’s pushed by meals, and inside that, largely by greens. Vegetable inflation is 36 per cent and their total contribution to CPI inflation is 42.8 per cent. The highest 10 commodities that contributed most to CPI inflation in September are all greens. No marvel, greens have put RBI in a bind.
To be honest to the RBI, allow us to see its file in taming inflation because it adopted the versatile inflation concentrating on (FIT) framework, with a goal of 4 per cent +/- 2 per cent. Our evaluation of 101 months exhibits that CPI inflation exceeded the 4 per cent goal 72 per cent of the time, and in 28 per cent of the circumstances, it surpassed the higher threshold of 6 per cent (Determine 1).
Numerous elements have impacted CPI inflation throughout this era. These have ranged from plunging worldwide costs, particularly of crude and meals, to lowering the fiscal deficit within the early years of this era (2016 to 2019) when inflation was tamed under 4 per cent. After that, disruptions in provide chains throughout Covid-19, and the Russia-Ukraine battle in 2022, pushed up world in addition to home inflation.
The outsize affect of CFPI on total CPI inflation boils all the way down to the outdated weights assigned to meals and drinks within the CPI basket. At the moment, they account for 45.9 per cent of the CPI, with meals alone making up 39 per cent, primarily based on a 2011-12 consumption survey. It’s excessive time these weights are up to date, primarily based on the 2022-23 consumption survey. The RBI nonetheless deserves credit score for sustaining inflation at ranges decrease than in lots of rising markets and creating economies (EMDEs). Based on IMF information, in 2024, India’s inflation stood at 4.4 per cent, effectively under the EMDE’s common of seven.9 per cent. However the higher the proportion of meals in total CPI, the tougher it turns into for financial coverage alone to regulate inflation. So, changing outdated meals weights in CPI with new ones, that are more likely to be about 5-6 proportion factors much less, needs to be a precedence to mirror the truth higher.
Allow us to dive deeper into present meals inflation. The current surge in vegetable inflation, notably pushed by tomatoes, onions, and potatoes (TOP), is a direct manifestation of structural weaknesses in India’s agricultural provide chains, compounded by adversarial weather conditions. In September 2024, vegetable inflation contributed a staggering 63 per cent to the meals inflation (CFPI), with year-on-year value will increase of 42.4 per cent for tomatoes, 66.2 per cent for onions, and 65.3 per cent for potatoes. These figures usually are not merely anomalies, they’re symptomatic of deeper inefficiencies and vulnerabilities of their worth chains that demand pressing coverage consideration.
Tomatoes observe the basic “cobweb mannequin” of value cycles, the place brief provide shortly pushes up costs as a consequence of their perishable nature. Present costs of Rs 60-80/kg stem from delayed kharif arrivals as a consequence of heavy rains in Karnataka and Andhra Pradesh. Karnataka’s key manufacturing belts — Chikkaballapur and Kolar — suffered a 20-30 per cent yield loss from white fly infestations, worsening the provision scarcity and fuelling meals inflation.
Onion retail costs, at present between Rs 50-60/kg, spotlight extreme provide disruptions. Among the many three rising seasons, solely the rabi crop might be saved from March to October, serving as a buffer throughout lean months. This 12 months, onion storage is barely decrease than final 12 months, with Maharashtra reporting 1.3 LMT storage loss. Incessant rainfall in Maharashtra, Karnataka, Telangana, and Andhra Pradesh has broken the kharif crop, delaying arrivals and tightening provide.
Saved shares of potatoes get launched from Could to November wherein October sees the most important launch because the rabi potato begins to perish by that month. The decrease arrival to mandis has resulted in a spike in costs. A part of this surge might be attributed to the low base impact from the earlier 12 months.
India’s recurring value volatility in TOP crops calls for a extra resilient agricultural coverage. Whereas Operation Greens launched in 2018 aimed to stabilise costs by streamlining worth chains, its enlargement to cowl all vegetables and fruit diluted its authentic focus. Because of this, provide disruptions and important post-harvest losses — 18-26 per cent for potatoes, 25 per cent for onions, and 11.6 per cent for tomatoes — proceed to drive up retail costs. Such losses shouldn’t be taken flippantly, in any case, a spike in onion costs within the 1998 elections prompted the Vajpayee authorities to break down.
Quick-term measures just like the current 40 per cent export obligation on onions reveal the federal government’s client bias and knee-jerk reactions. The answer lies in processing a portion of TOP crops throughout surplus durations: Changing not less than 10 to fifteen per cent of tomato manufacturing into paste and puree and dehydrating onion into merchandise like flakes and powder. Profitable fashions like Jain Irrigation’s onion dehydration partnership with farmers, exhibit how such initiatives can cut back wastage and increase farmers’ revenue.
What’s actually wanted is a devoted company, staffed with consultants centered solely on tomatoes, onions, and potatoes. With out such specialised oversight and long-term methods, RBI will stay in a bind on the repo charge. It must press for these long-term methods with the federal government as this goes past its jurisdiction. Solely then can it heave a sigh of reduction from veggie inflation.
Gulati is distinguished professor, Chanda is analysis assistant and Roy is a senior fellow at ICRIER. Views are private
