Onion Price Rise: Bring Onions Under the Essential Commodities Act

Increasing onion prices had sent the experts, economists and the journalists looking for answers. For the past few days we have seen a flurry of activity, beginning with the media playing up the issue of rising prices of fruits and vegetables, and trying to create a fear psychosis among the people in the wake of a deficient monsoon that stares ahead. The Govt went into a tizzy examining various suggestions coming from economists and the bureaucrats, and finally the Finance Minister Arun Jaitley took the right decision. He directed the State Governments to crackdown on hoarders and speculators.

The State Governments need to be empowered by first bringing onions and potatoes under the Essential Commodities Act.

But the onion crisis came in handy for some economists to use the crisis situation to push what they have been trying to do for nearly a decade now. Remove fruits and vegetables from the APMC Act was on the top of the agenda, followed by lowering the import tariffs on fruits, vegetables, milk and chicken legs as the plausible solution for bringing down the prices. At a many a TV shows I encounter economists, who have probably never been to a crop field, seeking immediate imports of fruits and vegetables. And when I question the need saying India had a record foodgrain production in 2013-14, and also that of vegetables and fruits, many of them just continued to harangue the public of their ignorance.

A news report in Times of India (Despite record onion yield, prices shoot up. June 20, 2014. http://bit.ly/1qkf0Fy) says in 2013-14 India harvested 19.3 million tonnes of onions, which is 19 per cent higher than the previous crop. Even discounting the crop damage resulting from unseasonal rains and hailstorms, and knowing that the area under onion cultivation had soared by over 400 per cent in Gujarat and by about 15-20 per cent across the country, there is no reason why prices should have doubled in a week's time. In April and May 2014, onion price inflation was in the negative when it came under monitoring for estimating the Wholesale Price Index (WPI). Only a trader-agent nexus could drive the prices high in the next fortnight. And that's exactly what happened.

Economists merrily joined the speculation exercise. Not questioning the strong cartels that operate, their entire emphasis was to use the opportunity to allow cheaper imports. Some even went to the extent of wanting the Govt to allow onion imports to meet the expected shortfall. Others forced the Govt to raise the Minimum Export Price for onions, which I feel is a classic example of food mismanagement. Such ad hoc decisions only destroy the markets for the Indian exporters. Others of course pushed for more food processing, not telling that the prices of processed onions would be several times higher making it still a bigger burden on the poor as well and the middle class.

Nevertheless, I have always maintained that taming food inflation only requires a strong political will. It doesn't require more than a month to bring down the prices. All you need is to exercise a danda.

An interesting field report in The Economic Times (Onion Price Rise: Nashik Farmers Put Blame on Hoarders. June 20, 2014. http://bit.ly/1lNOoHz) says it all. "Amid apprehension of onion prices sky rocketing to Rs 100 per kg by October, farmers from India's largest onion fields in Nashik allege that traders are hoarding over 20 lakh tonnes of stocks in anticipation of rising demand during monsoon that will push the prices higher. According to the farmers, all these traders are part time politicians and they indulged in hoarding last year as well."

A year back, in my blog post Let's Chop the Onion Cartel (Aug 23, 2013. http://devinder-sharma.blogspot.in/2013/08/lets-chop-onion-cartel.html) I had said: "No political party wants to ruffle the traders with any stringent action. Traders hold the strings to the political purse, and a crackdown against hoarding and speculation would mean chopping off the financial cord." APMC has been monopolised by a handful of big wholesale traders who control almost all aspects of the onion trade or for that matter the entire vegetable trade. The answer however does not lie in dismantling APMC but reforming it.

Regarding de-listing fruits and vegetables from the APMC Act. After Rahul Gandhi had in January directed Congress Chief Ministers to remove vegetables/fruits from APMC Act, Haryana, Himachal Pradesh and Uttarakhand have followed his directive. It will be interesting to know whether vegetable and fruit prices have come down in these States.

Further reading: 
1. The Onion Story: It was all planned. 
http://devinder-sharma.blogspot.in/2013/08/the-onion-story-it-was-all-planned.html

2. What a Stupid Idea. Dehydrated onions is not what Indians need.
http://devinder-sharma.blogspot.in/2013/10/what-stupid-idea-sir-ji-chopped-and.html

Let's chop the onion cartel

Every time onion prices hit the roof, or for that matter, whenever food inflation inches upwards, it is amusing to see economists invariably pointing to supply-demand constraints and the urgent need, therefore, to modernise the supply chain. And that has always left me wondering why economists can never see beyond the fundamental prescription enshrined in the economic textbooks. It doesn’t always hold true.

The onion crisis is no different. At a time when the electronic media was screaming at the top of its voice, I heard many an economist, who had probably never been to a crop field, repeating ad nauseam what they had been taught in their classrooms.

Onion prices had hit a two-and-a-half year high in August at the back of fears of a drop in production in key areas because of drought last year, and in some areas, the heavy rains turning to be a spoilsport. The emphasis, therefore, was on the need to streamline the supply chain, with some newspapers even suggesting irradiating the vegetables to extend its shelf-life.

From a maximum of Rs 10 per kg in June, onion prices had shot up to Rs 70-80 per kg in a few weeks, finally stabilising at Rs 50-60 when the government announced a slew of measures, including imports and quantitative restrictions on exports. Although Union Agriculture Minister Sharad Pawar had said that prices would remain high until October when the new crop comes in, strangely the wholesale prices began to soften to coincide with the announcement of import-export measures.

This is not the first time the onion trade has played truant. In December 2010, onion prices were on fire. Even prior to that, onion prices had flared up for three years in a row between the months of September to December. And I had always maintained that barring some seasonal variation, there was no reason for onion prices to soar by 400-500 percent. Even this year, the production shortfall has been anticipated at a mere 4 percent and the prices have gone up by as much as 600 percent on an average. How can this stupendous price hike be attributed to supply-demand constraints?

For several years now, I have been saying that the extreme volatility in onion prices (and also that of other vegetables/ fruits) is the handiwork of a cartel that operates in the wholesale trade. A handful of trading families have cornered the entire trading activities, thereby very conveniently manipulating the market. Large-scale hoarding of onions goes on unchecked.

The reason is obvious. No political party wants to ruffle the traders with any stringent action. Traders hold the strings to the political purse, and a crackdown against hoarding and speculation would mean chopping off the financial cord.

It is not that cartelisation operates only in agriculture. Take the case of airlines. You click three times on a flight route on the Internet, and the ticket price goes up. Private airlines have charged as high as Rs 25,000 for a one-way ticket between Mumbai and New Delhi, taking advantage of cancelled flights that day. Now look at the prices of eggs. If supply-demand is the mantra, then how come prices of eggs are almost uniform throughout the country? How come the demand for eggs remains the same in New Delhi and Bathinda, for instance? It is because a handful of people/companies decide the egg price for the day.

I can go on with such illustrations. Often the blame is rested on the Agriculture Produce Market Committee (APMC) Act, which regulates the agricultural markets. But there is no APMC Act for the airline industry. And look how conveniently they have unbundled the prices to even charge for a seat preference.

In agriculture, organised retail players such as Reliance Fresh, Easy Day, Big Bazaar, Spencer’s and others who buy the produce directly from farmers, too, have failed to pass on the price benefit to consumers. Replacing one set of middlemen with another, therefore, is not the answer.

Source: Tehelka Issue 35, Vol 10. Aug 31, 2013

http://www.tehelka.com/lets-chop-the-onion-cartel/