Decoding onion inflation - a multi-layered tragedy

Seasonal factors may provide interim relief every once in a while, but in India, an onion upswing is always around the corner

Onion prices have hit that ugly and politically unpalatable Rs 100 per kilo mark (at least the good quality ones), sending the government of the day into a tizzy. Perhaps, the layered, intricate composition of the commodity is an apt allegory to the analytical complexity of decoding the onion conundrum that economists have been grappling with, for a long time now.

There are a confluence of reasons for the current upswing in prices say farmers, politicians and traders. These include: 
 

· Low supplies due to lower planting 
 

· Damage to Kharif crops due to rains 
 

· Hoarding and price fixing by traders 
 

· Rot due to high moisture content in some crop 
 

· Attractive export prices as a result of rupee depreciation, reducing domestic supplies 
 

While these reasons partially explain the recent upswing in prices, they do not spell out why prices have shot through the roof so dramatically when production has been hit only marginally. They also fail to throw light on why we’ve seen the baffling volatility as well as consistent onion inflation at the retail level for years since 2009, despite better yields and increased acreage.
 

“Last year production was 163 lakh quintals, consumption was around 120 lakh quintals and exports ranged between 16-18 lakh quintals. That left you with a surplus of 20 lakh quintals” says Devinder Sharma, Food Policy Analyst. “Why then were prices still elevated? “ 
 

Consider these findings from a recent Business Standard report which shows that the “monthly average price of onions ranged between Rs 11.50 and Rs 25 a kg in retail markets of Delhi in 2010.  In 2011, prices of the same commodity moved between Rs 11and Rs 50 a kg, the very next year it touched a year high of Rs 23 and low of Rs 12.50 per kg. Average monthly retail prices have oscillated between Rs 15.50 and Rs 61 a kg till September 25 in 2013”. Today prices are ruling at Rs. 100, but within 2-3 weeks, could show a correction according to Agriculture Minister Sharad Pawar, further demonstrating that this volatility is inbuilt, no matter rain, hail or sunshine.
 

So what’s causing it? Experts point to 3 critical market distortions: 
 

MASSIVE RETAIL MARK UPS
 

“The feature of this current rise is the differential between the wholesale and retail level prices. Past the mandi, intermediaries and the retailers are charging huge mark ups at the retail level. And since an arbitrage cannot be created between retail prices at two different places, price equilibrium has automatically set in, jacking up prices across the country” says Madan Sabnavis – Chief Economist at CARE Ratings. 
 

No surprise then, that while the average wholesale price of new crop at Lasalgaon, the biggest onion producing mandi in the country was 37% cheaper than in the summer according to the Times of India, retail prices didn’t capture that drop, showing that the crisis was indeed partially man-made. 
 

WHOLESALE MANUPULATION 
 

Go backwards into the value chain. The manipulation at the wholesale level in the APMC mandis has been minutely chronicled by the CCI in its report, Competitive Assessment of Onion Markets in India 2012. This report clearly points to rampant hoarding, anti-competitive practices and collusion between a few established traders who dominate the market extraordinarily, with huge entry barriers for new entrants. A CCI investigation in 2010 showed that a single trading entity i.e. Saibaba Traders accounted for 1/5th of all onion trading according to The Mint. 
 

How is that possible? Through vertical integration of various market functions, points out the study. “Traders wear many hats by bending (not breaking) the APMC rules and bye laws. Many onion traders are commission agent cum wholesalers, order suppliers, forwarders cum store owners and some are even transport or railway agents too.

They have different firms with or without licenses to handle same function… Such multiple roles by select few big traders have brought inequality between traders. So, big have become very big which has created monopolistic conditions. This lack of capacity to conduct multiple roles prevents farmers, their organizations to compete with traders.” 
 

IS POLITICS AT PLAY?
 

Add to this mess, political one-upmanship. Elections have been lost because of onions in the past, and the Congress government has already blamed hoarding in BJP ruled Madhya Pradesh for supplies not reaching Delhi. An economist not wanting to be named says politics cannot be ruled out. “While it might be conjecture, given how politicized our markets are, it isn’t improbable that politicians are resorting to concentrated price fixing to topple the government.” 

INELASTIC DEMAND 
 

But amid all these distortions, perhaps the deeply onionized Indian palette is also to blame partially. 
 

Unlike cabbage or egg plant, demand for the onion is most inelastic say experts, as it does not have a substitute, leading to a spike in prices on the smallest of disruptions. “There is no switch factor in onion, either you have onion or do not have, which makes its demand absolutely inelastic,” Chairman of Commission for Agriculture Costs and Prices (CACP) Ashok Gulati told Business Standard last month. 
 

WHAT NEXT? 
 

There are no short term fixes say experts. Cracking down on cartels, amending the archaic APMC rules are state subjects and barely 16-17 of the states have made any progress at all on the latter. Inadequacies in storage infrastructure and processing facilities only add to the existing set of problems. Reports suggest the government may ban exports, but international prices are in any case cheaper, and so there is hardly demand for Indian onions abroad. 
 

The CACP (Commission for Agriculture Costs and Prices) has suggested that the government build buffer stocks to create fear among hoarders and also hydrogenate onions to be sold in the lean season. It has also suggested importing cheaper onions and selling below market prices to bring down the domestic price. Whether the government accepts these suggestions remains to be seen. 
 

But what’s evident is that in the longer run, the onion challenge is a structural one and the rot lies deep. Seasonal and extraordinary factors may provide interim relief, but unless the system is overhauled, in India, an onion upswing will always be around the corner.