Key tomato-producing states — Andhra Pradesh, Madhya Pradesh, Karnataka and Odisha — witnessed lower than the headline retail inflation in August, thanks to good supplies there.
It’s official. The humble tomato plays a major role in determining food inflation. Official data reveal that tomato is the single-biggest driver of the recent spurt in inflation. It alone added as much as 78 basis points (bps) to the wholesale price index (WPI) in July and 76 bps in August, pushing up headline WPI inflation to 1.88% and 3.24% in July and August, respectively. Similarly, tomato drove up retail inflation, based on the consumer price index (CPI), by 45 bps in July to 2.36% and 62 bps in August to 3.36%, according to an FE analysis. Interestingly, key tomato-producing states – Andhra Pradesh, Madhya Pradesh, Karnataka and Odisha – witnessed lower than the headline retail inflation in August, thanks to good supplies there, the data showed.
Importantly, a price crash since late last year kept tomato inflation under check. Now, an unfavourable base (tomato inflation remained mostly negative in both the WPI and the CPI between September 2016 and June 2017) and elevated prices mean inflationary impulse caused by this commodity will continue to persist in the coming months, putting pressure on food as well as headline inflation. With core inflation picking up (it rose around 50 bps sequentially in the CPI in August) and domestic fuel prices continuing to rise along with higher HRA for government staff, a tomato-induced spurt in food inflation will make price pressure rather broad-based, and add to policy makers’ woes. This could also potentially dampen hopes of substantial monetary easing this fiscal although some anaylsts feel that modest cuts in repo rate can still be expected to spur economic activity, given that GDP growth slowed to a three-year low of 5.7% in Q1, FY18. The central bank has already predicted higher retail inflation for the second half of this fiscal – 3.5-4.5% against 2-3.5% for the first half – partly due to expected higher food inflation in the second half.
Monsoon rains had remained deficient or below normal in certain parts of central and southern India till a fortnight ago, keeping water reserves critically low in the southern regions against the benchmark average, which could affect sowing in the coming rabi season. In most states, tomato is harvested twice a year – between January and March and from October through December. Tomato prices may remain high unless a bumper crop is harvested in 2017-18. The government is yet to issue forecasts for the country’s horticulture production for 2017-18. However, if prices of farm items rise, rural incomes would get a boost and, consequently, consumer sentiments that have remained subdued in recent months could also soar. Private consumption, the key driver of the economic growth in recent years, could get a boost as well after a sequential slowdown of 60 bps in the first quarter of this fiscal.