It’s the politics, stupid. Why onion prices will continue to cross Rs 100 per kg

Onion_on_WhiteVivek Kaul 

A recent report in The Economic Times said that onion prices may touch Rs 100 per kg by October 2014. The report pointed out that “hailstorms and unseasonal rain in the past, along with the weak start of the monsoon season has created scarcity and strong inflationary pressures.” For the week between June 12-18, 2014, the rainfall had been 45% below the normal.
If this trend continues, chances are that vegetable prices in general and onion prices in particular may rise in the months to come because a lack of sufficient rainfall will lead to a fall in production. Nevertheless, vegetable prices have risen over the last few years, despite a steady increase in production.
A standard explanation for the inflation in vegetable prices over the last few years has been that the demand for vegetables has far exceeded their supply. Data provided by the National Horticultural Board tells us that India produced 129.07 million tonnes of vegetables in 2008-2009. This number had gone up to 170.2 million tonnes in 2013-2014.
This meant an absolute increase in production of around 32% over a period of five years or an increase at the rate of 4.67% per year. This is a reasonable rate of increase though not a fantastic one. During the same period the vegetable prices more than doubled. Given this, there might be some truth in the argument that demand for vegetables might have outstripped their supply.
But this is clearly not true at least in the case of onions. The onion production in the country has gone up at a rapid rate over the last few years. In 2007-2008, it stood at 9.14 million tonnes. This more than doubled to 19.3 million tonnes in 2013-2014.
Hence, Indian farmers are clearly producing enough onions. Also, it is safe to assume that demand for onions couldn’t have suddenly doubled over a period of five years. So, what explains the fact that onion prices have crossed Rs 100 per kg several times over the last few years and in the months to come the same scenario might play out again? The simple answer is hoarding. While most vegetables cannot be hoarded given that they rot quickly, onions last easily up to six months. This leads to their hoarding by traders in Nashik, Navi Mumbai and the Azadpur (in New Delhi)
mandis.
As the report titled Competitive Assessment of Onion Markets in Indiawhich was commissioned by the Competition Commission of India points out “A few big traders having well connected networks with market intermediaries in other markets seem to play a major role in hoarding for expected high prices.”
These traders typically start hoarding onion in the post harvest season. By doing this they manage to tighten supply in the lean season. “The lean season also happens to coincide with start of major festivals and ceremonies like marriages in India. This clearly manifests itself during months of September to January, in which the supply from onion producing regions is minimal and festivals like Dasera, Dipawali, Eid, Chrismas and marriages and other ceremonies put higher pressure on the demand of onion,” the report points out.
It is not difficult for the government of the day to identify who these traders are. But most of these traders are close to political parties. Take the case of the traders operating at out Nasik and Navi Mumbai. These traders are known to be close to
Sharad Pawar’s Nationalist Congress Party. Given this, it was not surprising that when Pawar was the agriculture minister he regularly made statements that drove up onion prices. (You can sample a couple of statements here and here)
Economist Devinder Sharma
in a blog written in December 2013 points out “The Azadpur mandi traders association in Delhi is aligned to the ruling Congress party. In Punjab, on the other hand the traders associations predominantly back the ruling SAD-BJP combine.”
This explains to a large extent why politicians tend to look the other way when onion prices are rising, and they even go ahead and make insensitive statements. Take the case of Kapil Sibal, who when asked about the rise in onion price in September, 2013 had said “Ask the traders this? The government does not sell onions.”
Given this, it is not difficult for the government to control the price of onion, if it wants to. All it needs is a few basic steps. As the report commissioned by the Competition Commission of India points out “For these, measures such as cancelling license for a temporary period; putting fines and penalties, and monitoring closely the behaviours of traders for any intentional hoarding, could be taken.” Of these measures, monitoring the behaviour of traders for any intentional hoarding is the most important.
Having said that, the onion production may have seasonal variations and that may drive up the price of onion. But that still does not explain the astonishing rise to Rs 100 per kg several times over the last few years. As
Shreekant Sambrani writes in the Business Standard “ A five per cent reduction in its supply supposedly causes a 50 per cent increase in its price. While its per capita availability trebled in the last decade (faster than the per capita income, which doubled), its price rose fourfold in the same period.” Hoarding is the only possible explanation.
Potato, is another vegetable, which like onions, doesn’t rot immediately, and hence can be hoarded. Potato production has grown at the rate of 6.2% per year between 2008-2009 to 2013-2014 to 46.4 million tonnes. Between 2012-2013 and 2013-2014, the production grew by only 2.3% but the prices over the last one year have shot up by more than 30%. Hoarding is a major reason for the same.
Given this, the government needs to ensure that the prices of onion and potato are decided on true market demand and supply, and not because of hoarding. The inflation that the people faced during the second term of the Congress led UPA government was a major reason why the Narendra Modi led BJP was elected to power.
Hence, it is important for Modi and his government to do all that they can do on the inflation front. If they don’t, there will be trouble ahead. As Sambrani puts it “Inflation is a two-edged sword. Hurt in the pocketbook, the 
aam aurat could start venting her wrath on the new government. Onions don’t respect ideology while bringing tears.”

The article originally appeared on www.firstbiz.com on June 26, 2014.

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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