The flamboyant and voluble Minister for Commerce and Industry, Anand Sharma, declared war on the poor onion with the words, “Not a single onion will be allowed to leave the country!” Mr Sharma’s bravado and the government’s knee-jerk response to rising onion prices seem to have had a salutary effect but that may have been more because some dehoarding may have been done by speculators, because onion exports in April-November 2010 were, in fact, significantly below the level for the same period last year. Compared to 13.83 lakh tonnes of exports in April- November 2009, only 11.59 lakh tonnes were exported in the first eight months of fiscal 2010. Close on the heels of onion prices, the prices of tomato and other vegetables also seem to be on the rise. Several factors may have contributed to this sudden spurt of vegetable prices, but the most important could well have been rising winter demand. In its economic resolution passed at the special session of the All India Congress Committee, the Congress party very correctly identified at least three reasons for the generally high food price inflation of recent months, namely, rising domestic demand, higher support and procurement prices and global commodity price rise. In the case of vegetable prices, demand is the key variable. The margin of speculative hoarding is limited given the perishable nature of the commodity.
The wide margin between farm gate and retail market price of onions, tomatoes and other vegetables clearly suggests that traders have been the bigger beneficiaries of short-term speculative attacks on vegetable prices. Which would be one reason for sharp spurts and subsequent immediate decline in the price level. Given the return of near 9 per cent growth, and that too a more broad-based growth covering rural and urban areas, and against the background of rising support prices for farmers, it is now clear that excess demand has come to play a larger role in exerting pressure on the price line. While this would suggest that monetary policy cannot remain on the pause button for too long, there are limits to monetary policy at a time when overall economic growth is driving the spurt in food prices. The consequent shift in terms of trade, even if not favouring the direct producer but mainly the intermediary trader, has distributional implications that cannot be entirely negative. It is becoming clearer by the quarter that every time India’s growth rate approaches 9 per cent per annum, inflationary pressures begin to reassert themselves. Allowing such inflation to ease the supply side, by inducing increased production, would be as helpful as squeezing the demand side with monetary policy. A balanced approach is, therefore, warranted.
