Supply reform urgently needed to check vegetable price shocks: RBI report

With runaway vegetable prices upsetting the inflation cart, Reserve Bank of India has said in its state of the economy report that the country badly needs major supply side reforms to prevent wild swings in vegetable prices.

“The vulnerability of the economy to recurring incidence of vegetable price shocks, especially ahead of and during the monsoon, warrants major reforms in perishable supply chains covering transportation networks, warehousing and storage technologies, and value addition processes that damp the amplitude of these swings,” the RBI report said.

The Trade Promotion Council of India, a trade and investment promotion organisation, states that as much as 30-40% of fruits and vegetables are wasted due to lack of proper cold storage and handling facilities.

The concern of the RBI can be gauged from the fact that just when retail inflation appeared to be cooling, vegetable price shocks elevated the rate of inflation to much above the bank’s tolerance level of 6%.

The rate of Consumer Price Index-based inflation that progressively cooled from 4.76% in April to 4.25% in May and crawled up to 4.9% in June shot up to 7.44% in July, prompting RBI to redraw its inflation projection for the entire quarter and year.

Vegetable prices was found to be the main villain for the sharp spike in the rate, with some calculations showing that without that element the rate would have dropped by about 200 basis points. Also, the core inflation (consumer price index that excludes food items, fuel, petrol and diesel) stood at 5.1% in July.

It might be mentioned that the tolerance band of RBI is at 6% while the comfort level is 4%, far away from the current levels.

“Inflation data for July 2023 that have been released in the first half of August indicate that the genie of inflation is still out of the bottle – upticks have flattered to deceive the good feeling of moderation that had just started to set in during May and June,” said the RBI report.

One of the villains this year has been tomato that suffered damage to the crop by excessive rains and flooding in some parts of the country. The RBI report puts forward the logic of minimising loss of any crop during storage, transportation and handling so that almost the entire harvested amount reaches the market and does not cause shortages or supply disruptions.

Ironically, just when the RBI report was made public the country was facing a shortage of bananas – another perishable like the tomato – with prices rising in some key markets such as Bengaluru and Mumbai after the crop suffered in Tamil Nadu, the highest producer of the fruit in the country. Packed with energy and nutrients, the humble banana is one of the cheapest fruits that is popularly consumed by the common people across the country. The price of banana has doubled to Rs 100 a kilo in Bengaluru.

However, the RBI report mentioned that despite the veggie prices rocking the inflation boat, the country’s overall economy is expected to regain momentum in the second half of FY24, when the apprehended shrinkage in exports could be offset by robust private consumption and investments.

While the RBI governor had earlier cautioned against global headwinds, the report said that a decline in global industrial production and weakening trade could dampen the recovery in global economic situation. High debt levels, volatile financial conditions, El Nino effect giving rise to extreme weather patterns, Fitch downgrading US sovereign credit rating and geopolitical tensions could weigh down on the economic recovery process.

“This unexpected development overwhelmed recent data arrivals that seemed to suggest that the global economy could avoid a hard landing… In this stressed global environment, the Indian economy appears poised to regain momentum (on a quarter-to-quarter basis) in the second quarter of 2023-24 after a dip that typically characterises the first quarter,” the report added.