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Informist, Thursday, Oct. 3, 2024

 

NEW DELHI – India should consider re-starting futures trading in potatoes and allowing the same for onions, a paper co-authored by Reserve Bank of India staff has recommended.

 

"Potato was traded on the Commodity Exchanges in India till 2014 after which it was banned. Re-launching of potato futures and launching futures trading in onion especially for the rabi variety can be explored for optimal price discovery and risk management," the working paper, titled 'Vegetables Inflation in India: A Study of Tomato, Onion and Potato (TOP)', published Thursday, said.

 

The study, part of a joint research project between the Indian central bank and Indian Council for Research on International Economic Relations, or ICRIER, does not represent the views of either the RBI or the New-Delhi based think-tank. The authors of the paper are from ICRIER and include renowned agricultural economist Ashok Gulati as well as officials from the RBI's Department of Statistics and Information Management, Department of Economic and Policy Research, and the Monetary Policy Department.

 

Trading of potato futures on the Multi Commodity Exchange of India Ltd was stopped in September 2014 following weak levels of participation and one-side price movements. Trade in commodity derivatives has sometimes been blamed for a rise in prices of goods, with the Securities and Exchange Board of India in October 2023 extending its ban on derivatives trade in paddy, wheat, chana, mustard seeds, soybean, crude palm oil, and moong until the end of 2024. However, the RBI had noted way back in 2010 that there was no conclusive evidence to back the claim that spot prices of commodities were related to futures prices.

 

'Food and beverages' make up 45.86% of the CPI, with potato, onion, and tomato accounting for 0.98%, 0.64%, and 0.57%, respectively. Despite constituting just 2.2% of the entire CPI basket, these three vegetables are key drivers of the headline inflation rate as their prices move tremendously due to global and domestic supply-side factors. With the RBI unable to directly control food inflation, the government has in recent years become more and more active in taking measures to stabilise food prices, particularly vegetables, cereals, and pulses.

 

As per latest data, while CPI inflation has been within the RBI's mandated flexible inflation target range of 2-6% since August 2023, retail food inflation was as high as 9.36% until June, before dropping to 5.42% in July, thanks to a favourable base. The influence of food inflation on the headline has been so large that the Economic Survey for 2023-24 (Apr-Mar), released on Jul. 22, suggested the RBI targets inflation excluding food. The suggestion was widely criticised, with even Governor Shaktikanta Das saying in August that the high weight of food in the CPI meant "food inflation pressures cannot be ignored".

 

According to the working paper, farmers of the three vegetables are getting only one-third of the price that a consumer is paying for them, with the remaining two-thirds being captured by wholesalers and retailers.

 

"Marketing reforms, storage solutions, enhancing processing capacity, and raising yields through higher R&D (research and development) investments in developing climate resistant varieties and innovative cultivation techniques would be critical for improving the value chains, increasing farmers' share in consumer rupee and containing price volatility," the paper added.  End

 

Reported by Siddharth Upasani

Edited by Akul Nishant Akhoury

 

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