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Extreme Weather Events and Vegetable Inflation in India
Extreme weather events like cyclones, heavy rainfall/floods, thunderstorms, hailstorms, and droughts often damage standing crops, causing supply shortages and spikes in vegetable prices in India. Such supply shocks push up food inflation and also increase food price volatility. This paper analyses the impact of such extreme weather events on the prices of three key vegetables, that is, tomatoes, onions and potatoes in India. It also tries to find out whether the inclusion of these weather events improves out-of-sample forecast performances. The paper concludes that these events have a significant impact on the prices of TOP and aids in forecast performance in the case of onions and potatoes. Therefore, monitoring the occurrence of such extreme weather events in important TOP-producing states can help in predicting future surges in prices of these vegetables and improve forecasting performance of food inflation in the short term.
The views expressed in the paper are those of the authors and not necessarily of the institution to which they belong.
Despite record foodgrains and horticulture production, food price inflation in India has not only increased but also become more volatile during 2019–21. A large part of such volatility is induced by vegetable (especially tomato, onion and potato [TOP]) prices. Such volatility results in large projection errors in inflation (RBI 2020). Coexistence of record production of horticulture crops along with large volatility in prices suggests the role of extreme weather events in affecting supply and supply chains and thereby impacting retail prices. In India, the impact of such weather events gets magnified due to agriculture’s primary dependence on monsoons and dominance of informal channels of marketing.
Weather-related shocks usually impact the short- to medium-term price dynamics and output gap, which may have long-run macroeconomic effects on potential output, the natural rate of interest, sectoral composition and international competitiveness (NGFS 2020). Such short-term climatic variations often lead to heightened inflation, uncertainty and volatility (particularly for food prices), justifying the presence of an escape clause or a band surrounding the target to absorb such shocks (RBI 2021). The temporary disruption of the supply chain and the physical losses can create transient shortages of goods, subsequently raising the prices. The severity and persistence of such shocks create challenges for inflation projections. This may lead to policy errors as it is the base for policy formation. Short-term supply shocks in food prices also affect the medium-term inflation expectations (Pattanaik et al 2019).
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