Wholesale-retail inflation gap in perishables highest during lockdown

Divergence seen narrowing in June as lockdown restrictions are eased

The Covid-19 pandemic has laid bare the oft-repeated disconnect between wholesale and retail prices of farm commodities, especially perishables such as fruits and vegetables.

Though supply disruptions have considerably eased after the country entered the unlock phase, prices of some vegetables haven't declined considerably for the consumer.

But for farmers, these elevated price levels haven’t meant big gains, as they were forced to sell their produce at cheaper rates to avoid damages while consumers paid higher prices for the same.

The disconnect is also reflective of a much-talked-about improper and fragmented market for agriculture produce, something that was massively highlighted during the Covid-19 lockdown.

Supply disruptions and difficulty in movement of goods from one part of the country to another due to the wide disconnect between producing and consuming centres pushed up prices for consumers, but didn’t provide any relief to farmers.

This was more pronounced in perishables and not so much in cereals or in crops that don’t have any procurement support.

Widening gap in April-May 

Wholesale-price index (WPI)-based food inflation in April was 3.83 per cent, and slipped to 1.13 per cent in May. The consumer price index (CPI) for food items during the same period dropped from 11.72 per cent to 9.28 per cent.

The gap between the two widened from 7.89 percentage points in April to 8.07 percentage points in May. Both the CPI and WPI food inflation rates had been falling from December 2019 till March 2020.

Since then, though, the trend continued and the gap between the two widened. This signaled a breakdown in supply chain from the mandis to the household.

During the first two months of lockdown, though produce had started coming to the mandis with the easing of restrictions, their onward movement to the consumers’ plate remained broken for a long time.

This is because small tempo operators, handcart sellers and retailers faced problems in moving goods. Many neighborhood vegetable sellers also left for villages as economic activity slowed down.

“To me, it was essentially a supply chain issue,” Pronab Sen, programme director for the International Growth Centre (IGC)-India Programme and former chief statistician, had told Business Standard a few weeks back.

The country’s food grains, fruits, and vegetables production has shown a record increase this year, but it may not have translated into big gains for farmers except for crops in which there is direct buying by the government.

The country produced a record 291.95 million tonnes of food grains in 2019-20, or 2.36 per cent more than 2018-19.

Horticulture (fruits and vegetables) output is projected at an all-time high of 320.48 million tonnes, which is 3.13 per cent more than last year’s figure.

D K Joshi, chief economist at Crisil, said one could say that farmers were not getting the right price during the lockdown that is reflected in WPI numbers, even as consumers ended paying more. 

Perishables versus cereals 

WPI and CPI inflation data for broad food items shows that in April, May and June, when movement was broadly disrupted due to the lockdown and getting things to the consumers was difficult, the gap between WPI and CPI inflation was the highest in case of vegetables, followed by pulses and then cereals (see chart).

As Sudha Narayanan, associate professor at the Indira Gandhi Institute of Development Research, explains in a recent blog for IFPRI, “The price trends of different commodities have varied as well. Producer prices for perishables collapsed, and retail prices for fruits and vegetables have fluctuated widely over time and space—increasing substantially in some areas, declining in others; and rising since the lockdown in some cities.”

She said in contrast to perishables, producer prices have remained high for major cereals during the lockdown months, which was likely because of active government procurement. Retail prices in urban markets did not rise due to the Public Distribution System (PDS) that supplies grains to consumers, and also possibly because of large-scale grain distribution to vulnerable populations by civil society organisations.

Going forward 

As the country unlocks, though supply disruptions have been rectified, demand remains muted for most food items as discretionary spends will remain under a cloud for some time to come.

Moreover, bulk consumption from hotels and restaurants hasn’t come back to normal as dining hasn’t started in urban centres, which will keep pulling demand down.

In the rural areas, meanwhile, Sudha Narayanan says the collapse in producer prices and farmers’ difficulty in selling their produce imply lower prices and greater availability of a variety of foods.

“But food security remains high mainly because of a large loss in incomes,” she adds.

To address this, Narayanan suggests that in rural areas, especially those underserved by markets, providing decentralised public procurement and distribution of fresh produce, in addition to cereals, pulses and oilseeds, is crucial to moderate producer prices and ensure availability and affordability of foods locally.

For cities and urban centres, she suggests that governments need to facilitate free functioning of supply chain actors. 

Inflation numbers for three months ending June 2020
.	April		May		June
.	WPI	CPI	WPI	CPI	WPI	CPI
Cereals	3.63	7.75	1.97	7.30	2.72	6.49
Vegetables	3.14	23.60	-12.48	5.45	-9.21	1.86
Pulses	14.63	22.77	11.91	21.06	10.10	16.68
Fruits

0.26 2.67 0.46 1.98 2.31 -0.68 Food Inflation 3.83 11.72 1.13 9.20 2.04 7.87

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