Onion and fiscal tears

The parity in the prices of onion, beer and petrol (Rs 75), couple of weeks back became a source of charade on social
media. Many of my friends, colleagues and students shared and “liked” this message and helped it to become viral on social media, thus they ostentatiously displayed their displeasure and anguish over the spiraling food inflation. Captivatingly, the reports related to skyrocketing onion prices (which even touched triple digit in some cities) hijacked the main stories and primetime of news channels for many days. The opposition parties serendipitously got a pertinent issue to leverage upon and target the government that too in the election year.

Onion prices have always been a politically sensitive issue in India. Interestingly, the onion prices had been instrumental in toppling two governments in the past. In 1980, the rise in onion prices helped Indira Gandhi to topple India’s first non-Congress government. She extensively used the issue of high onion prices in her election speeches to come back to power. Likewise in 1998 the BJP was discarded in assembly elections from Delhi and Rajasthan because of the highest ever onion price rise. In 2010 during the onion price rise the Prime Minister Manmohan Singh himself had to make a public statement in which he termed this as a “grave concern”. These clearly reflect the mystical correlation between the politics and onion prices.

The disturbing fact in the whole scenario is that even though the top leadership of the country is aware of the issue and its dire consequences; no concrete step is taken to address the basic anomalies. There was no consensus among the central ministers of the incumbent government about the causes for this price rise. The central agricultural minister attributed the price rise to lower-than-expected harvest due to an extended monsoon that damaged crops in the main producing region in Maharashtra. The Commerce and Industry Minister Anand Sharma officially stated that hoarding by traders is a major reason for the sudden spike in prices.

In the lexicon of economics, the primary cause attributed to rise of onion pricing in India is supply side constraints. In simple words, the “supply side” is the umbrella term that incorporates all the factors and stakeholders that are involved in or influence the production, distribution, transportation and marketing of any commodity. History is testimony of the fact that the governmental responses to price rise in case of onion had been ad hock and marred with short sightedness. The incumbent governments generally respond the erratic price rise with textbook measures: they either curb exports or import onions to improve supplies. Such measures solve the problem for a short period but no long-term gains are made. To be very precise the governmental response only helps to augment the supply but does not addresses the supply side constraints.

A good monsoon or a drought can interrupt harvests. But what compounds weather-related problems is the corruption in India’s commission-based onion trade which is opaque and largely oligopolistic. Traders raise prices at the slightest hint of a drop in output. To understand this in detail it is quintessential to understand the details of Agriculture Produce Marketing Committee (APMC) Act which regulates the agricultural distribution and marketing in India.

The APMC Acts were introduced in the 1960s by the state governments. These acts prohibited farmers from dealing directly with retailers. As per the provision of the act the farmers could sell their produce only through licensed middlemen or 'market functionaries'. The noble intention by creating regulated markets was that the price paid to farmers by licensed middlemen for their produce could be monitored, thereby ensuring that they were not exploited. But over the years it grew into a monster, gaining layer upon layer of intermediaries, none of whom added any value to the fruits and vegetables they traded even as they added on their own margins.

Farmers in present scenario sell their produce to licensed middlemen at the APMC mandis. These middlemen resell the same produce to wholesalers at the APMC market in urban areas. At these urban APMC markets, the produce passes on to retailers and then to the end-consumers at the urban retail markets. In the absence of market information farmers do not get remunerative prices and the middlemen get the major share in profit. Thus there is wide gap between the wholesale and retail prices with middlemen consuming the best of the pie. Going by the large differential between wholesale and retail prices — the latter is at least 50 per cent more than the former. Middlemen in APMC market are politically very well connected. These middlemen are in a position to make huge money at the cost of
consumers, in case of scarcity like in the present context. This clearly suggests that the lion’s share in the distribution of the agricultural commodities goes to the intermediaries and the players at the extreme end of the supply chain (i.e. producer and consumer) had to suffer on their behest. It’s time the government took steps to bring what is lacking in India’s onion trade — transparency.

The another issue that is significant to the issue of price rise of onion and other vegetables is the complete lack of efficient storage facilities, all that an increased supply response does is dramatically lower prices — till farmers are dumping onions on the highways as there are no takers. Due to inadequate storage facilities the buffer stock of the perishable commodities like fruits and vegetable as a cushion against the exigencies like erratic rainfall etc cannot be maintained. The Foreign Investment in the wholesale trade was permitted way back in 1997 but no significant investment has taken place in areas like cold storage, ware house management and post harvest infrastructure. Thus governmental intervention and public funding are pivotal to change the present scenario.

The FDI permitted in retail sector can provide some solace in the present scenario. To streamline the value chain of the organized retail and to access the agriculture produce directly from the producers, it would be quintessential for the multinational companies to make investment in the post harvest infrastructure.

In this era of globalization the government and public policy should create a conducive environment to attract investment and promote healthy competition in the farm sector. It’s the high time to get rid of intermediaries that grab the lion’s share without any value addition in the supply chain. Alternative supply chain models that adhere to disintermediation of licensed middlemen are essentially the need of the hour.