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Home >Specials >India's Bread Butter Economy >Are consumption pattern change and vegetable inflation linked?

Mumbai: The price of onions is a political hot potato right now, but India has battled persistently high food inflation for many years.

One theory that was put forward by senior officials at the Reserve Bank of India (RBI) was that the inflation problem has its roots in a sharp increase in demand for certain food items that people eat more frequently as incomes rise.

One example is protein-rich food. Increased consumption of pulses, eggs, fish and poultry were apparently driving up their prices. Now, with such protein inflation abating for a while, the steely gaze of the Indian central bank seems to be fixed on vegetable inflation. In an interview with Mint this month, RBI governor Raghuram Rajan hinted that rising consumption of certain food items such as fruits and vegetables may be driving inflation.

“We really need two transformations in this country—more investments and less consumption of certain kinds. There is still fair amount of inflation on certain kinds of household products, of course, vegetables, fruit and things like that. I am not saying that you want to limit consumption of food. But those are the places there is a fair amount of inflation," Rajan said.

The best way to check if structural shifts in consumption patterns are causing inflation is to see if there are changes in the share of expenditure on these food items in the consumption basket of the average Indian.

Thus on balance, there is little evidence to back the claim that households are spending disproportionately more on either protein-rich foods or on fruits and vegetables.

What explains vegetable inflation then? There are two key reasons. Both relate to supply-side issues rather than to demand. First, in the case of many vegetable such as onions, prices have seen a sharp increase over the past decade despite an unprecedented rise in production over the past decade. Unfair trade practices by a small group of politically connected traders in wholesale markets have distorted commodity prices in India.

Second, as a 7 October Credit Suisse report pointed out, the heavy concentration of production of key vegetables in a few states (e.g., 45% of onions in Maharashtra, 49% of cauliflower in West Bengal, etc.) limits a nationwide response in case of crop failures.

It is quite different from what Rajan has been saying.

This is the third in a several-part series Mint will run over the next few weeks examining the key changes in consumption patterns across India over the past few years, based on the official statistics published by the National Sample Survey Office (NSSO). For the earlier stories, go to www.livemint.com/ruralconsumption

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