Tomato-nomics: Cooling Inflation But Rising Prices. Why?

Indians are seeing red over soaring tomato prices. But there is a lesson on strategic price controls.

The curious case of rising tomato prices and food inflation. 

Courtesy - iStock

Tomato is a household favourite – from chutneys, sandwiches to face masks. What was once available at an average of Rs. 20/kg is now being sold at Rs. 200/kg. The unexpected surge is baffling and likely to continue for another few weeks. If McDonalds can feel the momentary pinch, then a middle-class Indian will make a cut into his budget.

But the rise in price confronts many deep-rooted challenges for the Indian economy beyond heavy rainfalls and the impact of climate change.

What is the Consumer Price Index (CPI), and how increasing food prices is pushing it up? 

CPI is defined as the change in the prices of a basket of goods and services that are typically purchased by consumers and households. Thus, economists use CPI to measure inflation and deflation. 

In May, consumer inflation in India stood at 4.25%, falling to the lowest in the last two years. With a rise in vegetable and food prices, that number is likely to shoot up to 4.6% by August. The 0.25 percentage point may not seem like a lot but it adds to lower-income and middle-class Indians' budget woes. On Monday, BJP President JP Nadda even justified the current price rise as,

“It is natural people will talk about price rise. But, also keep in mind some factors, such as the effect on the economy because of coronavirus, recession, and supply chain issues due to the Ukraine war. Aren’t countries like the US in trouble? Despite that, the International Monetary Fund and Morgan Stanley are saying that India is a bright spot in the global economy.”

BJP President JP Nadda

It is understandable for oil and gasoline prices to rise if there is a war raging in an oil-producing nation. But why did these factors not account for this massive bump in tomato prices last year when the war first broke out? Why now?

Distressed farmers and the impact of climate change

It is true that onions, potatoes, and tomatoes tend to become costlier during these months – a cyclical phenomenon every year. Unexpected heavy rainfall, heat waves and the impact of climate change have resulted in low yield and production as compared to other years. This has resulted in supply-demand mismatch. But at the root of the climate crisis is a distressed and aggrieved farmer. 

In February this year, thousands of farmers gathered in Nashik to raise their voices against the sharp dip in prices of crops such as onions, tomatoes, and coriander leaves, among others. They had even organised a march from Nashik to Mumbai seeking reforms in the agricultural laws. 

The impact of the heatwave was so grave that farmers in Maharashtra had started selling onion kharif produce well ahead of time in the open market. Prices came spiralling down to Rs. 7 and Rs 2 per kilo. Similarly, some farmers in Nashik were reportedly paid merely Rs. 1/kg for their tomato produce. Now, they are being sold at as high as Rs. 200/kg in retail markets across some parts of India. 

What is the government's 'Tomato Grand Challenge'?

The government has announced the ‘Tomato Grand Challenge’ with the aim to bring innovative and cost-effective solutions for pre-production, harvesting, and storage of the fruit. 

On an immediate basis, different states have also re-organised their individual distribution retail networks to cap soaring prices. The West Bengal government has directed Sufal Bangla to deliver fair-price vegetables in Kolkata, where tomatoes are available at Rs. 115/kg. 

But what if economists used this approach and strategy at a wider spectrum to provide some consumer relief on the increasing cost of living crisis?

Why the need of the hour is strategic price cap control

In the aftermath of the pandemic and amid fears of global recession and job cuts, Isabella Weber, an Economics Professor at the University of Massachusetts, has been advocating for strategic price controls. 

Simply put, Weber's theory underpins the idea that corporates and multinationals must cut down on their profit margins and rely on sales volumes to manage inflation. 

Price control is an economic policy where governments set, monitor and regulate minimum and maximum for the prices of goods and services to make them more affordable for consumers. Initially, there weren’t many economists who on-boarded her idea. Some even opine that she has overestimated the role of corporate greed in the battle against the present cost of living crisis. 

But her strategies have helped governments in Europe, particularly Germany, to manage inflation especially when the country was heavily dependent on Russia for energy. 

Weber had proposed regulating the price of natural gas: households and businesses would be guaranteed a fixed supply at an affordable, government-controlled price. Consumers would have to shell out extra for anything they burned in excess of that quota. This price brake model an otherwise seen as a modest initiative is now being similarly adopted for other commodities by governments across the European Union.

After almost four months in operation, inflation in Germany fell to 7.4 per cent, the first time that it had dipped below eight per cent in half a year. 

Would it be feasible for the government and India Inc. companies to replicate such revenue models in the Indian ecosystem as well?