After the Portuguese introduced the otherwise unassuming fruit called tomato to India, Indian cuisine became dependent on it. You take any Indian recipe and tomato will be an integral part of it. Indians are the second largest producers of tomato in the world. In the past month or so the prices of tomato across India have skyrocketed. The situation is so bad that McDonalds India has stopped using tomato. Consumers also are drastically cutting back on their consumption of tomato. In many places thieves are busy stealing tomato and even smuggling of tomato has begun from neighboring countries like Nepal.
Amidst this tomato crisis the Indian government is busy making a mockery of economic policy. Instead of doing something concrete to stop this rise of tomato prices, policy makers have announced Tomato Grand Challenge Hackathon to generate innovative ideas to enhance Tomato value chain and ensure its availability at affordable prices.
There is no need for any innovative idea to solve the problem of tomato price rise; these ideas already exist. It would have been enough if the policy makers learned little bit of economics during their schooling days as the laws of economics tell us what determines the price of any economic good. Knowing this would have informed the policy makers about what to do when the price of goods like tomato rises.
As Murray Rothbard discussed (Man, Economy and State, pp. 815-817), prices of economic goods are determined by an interaction of money and goods side demand and supply forces. Here is Rothbard,
We are now in a position to draw together all the strands determining the prices of goods. In chapters 4 through 9 we analyzed all the determinants of the prices of particular goods. In this chapter we have analyzed the determination of the purchasing power of money. Now we can see how both sets of determinants blend together.
A particular price, as we have seen, is determined by the total demand for the good (exchange and reservation) and the stock of the good, increasing as the former increases and decreasing as the latter increases. We may therefore call the demand a “factor of increase” of the price, and the stock a “factor of decrease.”
The ultimate determinants of the price of all goods are: the stock of money and the reservation demand for goods (factors of increase), and the stock of all goods and the reservation demand for money (factors of decrease).
We can now use this economic theory to understand why the price of tomato is increasing in India and how the policy makers can bring it down. One of the chief reasons for this price rise is the increase in the stock of money i.e., inflation created by the Indian central bank RBI. RBI has the monopoly over issuance of rupees in India, and that is why it is solely responsible for determining the stock of rupees. Since its creation it has continuously increased the stock of rupees to fund various welfare and warfare activities of its master, the central government (see figure 1 below). RBI is the enabler of big socialist government in India. This inflation has eroded the purchasing power of the rupee and that is one of the chief reasons why prices of everything keeps on rising year after year in India. This same inflation is also playing a role in higher price of tomato right now.
Another factor responsible for this high price of tomato is the decrease in the stock of tomato at this time due to various reasons like excessive monsoon rains and some virus infection to the tomato crop. Apart from the monsoon rains and the virus, massive mismanagement by the farmers and governments is also responsible for decrease in the stock of tomato. Every year Indian farmers destroy the crop of tomato or various other farm produces either because they don’t have cold storage or canning facilities, or they simply don’t know what to do when they have a bumper crop of the farm produce. This year in winter I personally saw Maharashtra farmers destroying their bumper crop of tomato on the roadside when I was there. Farmers also have been known to destroy their crops to raise its price or to protest some agriculture policy of the government.
These two combined factors of inflation and decreased stock of tomato have increased the price of tomato in India right now. Understanding these factors also means we are now in a position to know how the policy makers can reduce the price of tomato (and everything else).
First, to reduce the prices of farm produce the Indian central bank RBI must immediately stop inflating the stock of rupees by stopping the printing of any new currency. In this article I do not have time and space to discuss issues relating with optimal money supply. I advise my readers to read Murray Rothbard’s Man, Economy, and State for a detailed discussion of these issues. Once RBI will stop printing rupees the purchasing power of rupee will rise i.e., every rupee will buy more goods now compared to before. Not only the price of tomato but also all other goods will start to decline slowly.
Second, to increase the stock of tomato governments can import tomato from other countries, or better, get out of the way and let traders import tomato from outside countries. There are many countries in the world that produce tomato and those producers will sell their tomato in India when they can make profit selling them here. Instead of stopping Nepali tomato smuggling in India, Indian government should make such imports legal. Once tomato supply from the world will enter Indian markets, prices will come down quickly. Market forces can handle any price fluctuation if governments allow those forces to work freely. The policy of Indian government should be free trade with everyone; internally and internationally.
Thirdly, Indian farmers must learn new skills of canning farm produce to preserve them for long term usage. Entrepreneurs can also provide cold storage facilities to preserve food when the crop is bumper. In a poor country like India wasting anything doesn’t make any sense.
Lastly, we need successful farm speculators. Instead of portraying speculators and hoarders as villains, government should get out of their way and let them do their essential work of matching present supply with future demand. Market competition will weed out unsuccessful speculators from the market. The Biblical story of Joseph elucidates the importance of successful speculators. Abraham’s great grandson Joseph – who had the God given gift of interpreting dreams and looking into the future successfully – was a prisoner in Egyptian Pharaoh’s kingdom. Pharaoh sees two dreams. In one dream he sees seven healthy fat cows and seven ugly gaunt cows. In his second dream he sees seven healthy good heads of grain and seven thin heads of grain. Ugly and gaunt cows ate up healthy and fat cows, and thin heads of grains swallowed up seven healthy grains. Joseph tells Pharaoh that those seven healthy cows and grains of heads represent seven good years of bumper crop while seven ugly cows and seven thin grains of heads represent seven years of famine. Pharaoh puts Jospeh in charge of the economy and he decides to store farm produce in seven good years of abundance to use it up when following seven years of famine will start. He successfully saves Pharaoh and his kingdom from the famine. India needs successful speculators like Joseph. If Indian speculators stored tomato when the crop was good in winter then today prices would’ve not gone up like this.