An uneven monsoon has contributed to this shift in India’s inflation outlook for the fiscal, the report said. Vegetables, weighing 15.5% in the food index, are one of the most volatile components, and price spikes are not uncommon.
In the budget year 2020 vegetable inflation remained in double digits for seven months, leading to an average food inflation rate of 6.7%. While there was another period of double-digit vegetable inflation, averaging 15%, between March and September 2022, a repeat of this fiscal is unlikely, the report said.
The recent good news is that pressure on vegetable prices has eased, with inflation falling from a July peak of 37.4% to 3.4% in September, thanks to increased supply. In September, the prices of tomatoes, which are a major driver of vegetable price inflation, and several other vegetables had fallen significantly. However, onion prices remain a challenge and there is a chance that vegetable prices will rise again, CRISIL warns.
According to the report, data shows the following trends in recent years:
- Vegetable inflation has been on the rise, averaging 5.7% between fiscal years 2020 and 2023, compared to an average of 0% between fiscal years 2016 and 2019. This increase in vegetable inflation has contributed to the overall increase in average food inflation, from 2.8% in fiscal years 2016 to 2019 to 6.2% in fiscal years 2020 to 2023.
- The frequency of price increases for vegetables has increased. Of the past 100 months, CPI inflation for vegetables exceeded the 49-month average of 3.8%. It exceeded 7% in 35 months, 10% in 30 months and 20% in 13 months.
- The volatility of vegetable inflation has also increased dramatically. Measured by the standard deviation, the volatility of vegetable inflation, which was already relatively high at 11.1 during the fiscal years 2016 to 2019, increased to 17.3 during the fiscal years 2020 to 2023. In contrast, the volatility of food inflation during these periods is much lower, at 2.9 and 3.4, respectively.
Three key factors play a crucial role in shaping vegetable prices in India, especially the consumption of tomatoes, onions and potatoes (TOP), which constitute over a third of the CPI vegetable category. First, all significant price shifts in TOP vegetables have a direct impact on CPI vegetable inflation. For example, from fiscal years 2020 to 2023, vegetable inflation rose to 5.7%, compared to zero in the previous four fiscal years, mainly due to a sharp increase in TOP inflation of 9.1%.
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Second, the continued rise in TOP inflation has been a driving force behind persistently high vegetable inflation. In contrast, non-TOP vegetable prices have seen a slight decline.
Third, TOP inflation is characterized by significant volatility, which significantly exceeds the overall vegetable category. A recent study in the RBI’s monthly bulletin shows that while TOP vegetables make up a small portion of the CPI basket, their price volatility has a substantial impact on headline inflation.