Vegetable prices have shot up over the past few days. As it happens, both the farmers and consumers are reeling under this artificial price hike, while middlemen of APMC markets, as well as, vendors and hawkers are ripping off huge profits

The wholesale price index (WPI) based inflation fell to 4.7% in May, driven mainly by declining prices of manufactured items. However, this hides the fact about sky-high prices of vegetables and fruits. Just ask any common man about vegetable prices in his area.

Normally, prices of vegetables and fruits remain on the higher side between May and July due to unavailability and thus lower supply. However, this time around, prices of vegetables, especially in and around Mumbai are touching a new high every day. First, these people cited the local body tax (LBT) as reason for high prices of vegetables, ignoring the fact that there is no LBT on vegetables. This game of price increasing is being played mainly due to cartelisation of vendors and Agricultural and Produce Market Committee (APMC) Act that prevents farmers from selling their produce directly to consumers.

Street vendors and hawkers often sell vegetables at prices over 20-30% than the wholesale market or Agricultural and Produce Market Committee (APMC) market (for Mumbai, it is in Vashi) rates. However, this year, they have come up with a unique idea of 'normalising' prices of all vegetables. Therefore, over the past days most of the vegetables like tomato, lady-fingers (bhindi) and brinjal in Mumbai were sold at same rate ranging from Rs40 to Rs100 per kg, depending on the locality.

AgMarkNet, is a site maintained by department of agriculture and cooperation, for providing daily rates of different agri-commodities. According to the portal, onions at Lasalgaon market were priced between Rs600 to Rs1,400 per quintal (100kg). The price for potato at Vashi's APMC market is Rs1,200 per quintal. However, in the vegetable market at Dadar west, both onions and potato are sold at Rs25 per kg. A hike of almost 80% (on the maximum wholesale price) for onions and 108% for potatoes compared with the wholesale price.

Another example, as per the APMC market at Kalyan, the model price for green chillies was (as of Wednesday) Rs2,750 per quintal. However, green chillies are being sold at Rs60 per kg by vegetable vendors and hawkers in the city, a hike of 118%.

The situation is same for almost all vegetables, even outside the APMC market in Vashi that serves as wholesale grain and vegetable market for Mumbai and surrounding areas.

The main reason for this daylight loot is the APMC Act that prevents farmers from selling their produce directly to retailers or the consumer. The farmers can only sell their produce in government-mandated markets (mandis) to licensed middlemen. This also means, it is both the farmer and consumer who continue to be looted by the middlemen.

According to Goldman Sachs, middlemen have become monopoly buyers of agricultural produce, allowing them to take advantage of any shortage in supply, or spurt in demand, but they will not pass on the benefits to farmers or consumers.

In a report, published in July 2011, Goldman Sachs had said, although demand has remained strong due to rising incomes, which allows the middlemen to raise prices, there are some structural factors contributing to food inflation dynamics. The report said the unorganised nature of the distribution chain makes for multiple layers of inefficiency and rent seeking. At each stage, there is some loss of produce due to multiple hands the product goes through and inadequate infrastructure. 

The middle class population spends a bulk of their income on discretionary items like TVs and ovens and therefore benefit from the price decline across these categories. Low-income groups, in contrast, have lower discretionary income to spend on consumer durables, and hence, have not really gained from this trend. Given that poor households spend a higher proportion of their income on food-related articles, WPI inflation understates inflation faced by poor households. 

According to Dharmakirti Joshi, chief economist, CRISIL, "The middle and high-income groups benefit more from falling prices of non-food manufactured items, particularly durable goods, as they have higher disposable income to spend on other goods and services including consumer durables, and for savings. The poor, with limited discretionary income to spend on consumer durables, do not benefit much from their lower prices. In contrast, rising prices of food items strain their discretionary spending".

Coming back to inflation, as per official data released last week, WPI inflation declined to 4.7% in May from 4.9% in last month. This is the lowest since December 2009. While inflation in manufactured items and non-food items witnessed sharp decline, the same for food category rose to 8.25% from 6.1% in April 2013. The rise in food inflation was on account of increase in prices of onions, vegetables, cereals and protein-based items. Inflation in vegetables stood at 4.85% in May, against (-) 9.05% in the previous month. The rate of price rise in onion was high at 97.40% for the month, as against inflation rate of 91.69% in April.

Excess grain procurement by the government over the past year is partly responsible for creating artificial scarcity and pushing market prices higher. Cereal price inflation rose to a peak of 19% year-on-year (y-o-y) in December 2012 from a low 1.7% due to higher rice and wheat prices. There has been some moderation recently, but cereal price inflation remains elevated at 16% in May, leading to high food inflation.

According to KV Thomas, the minister of state with independent charge of the ministry of consumer affairs, food and public, the government is planning to sell around 17.5 million tonnes (mt) of grains, largely wheat, from its existing food stock. In June, rice and wheat stocks held by the government stood at over 77 mt, substantially above the prescribed buffer norms.

"The government’s decision to offload its excess grain stock, therefore, should be positive for cereal prices. This should also be buttressed by a likely favourable monsoon this year. However, this expected fall is largely cyclical as the medium-term trend in cereal prices will be determined by many factors, including the likely outcome of the Food Security Bill, " said Sonal Varma, economist, Nomura Financial Advisory and Securities (India) Pvt Ltd in a research report.