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| August 27, 2007 | Monday | Sha’aban 13, 1428 |
Onion price in politics
IT is a juicy edible bulb that adds punch to most South Asian cuisines, but for politicians in India it is a hot potato. The ordinary onion, which can bring tears to those slicing it while cooking, can do worse harm to the political class in India.
Onions are once again in the news, and politicians across the nation are fretting and fuming. Coincidentally – or otherwise – onion prices have started spiralling at a time when the United Progressive Alliance (UPA) government in Delhi is facing an existential threat, with the left supporters threatening to withdraw support over the Indo-US nuclear deal.
Onion prices fluctuate wildly in India, depending on supply and demand. The absence of free marketing channels for agricultural produce – with price discovery mechanisms and options and futures trading – adds to the woes of consumers and growers, while middle-men and a few government officials succeed in manipulating prices, or hoarding the commodities.
Politicians dread a spurt in onion prices, especially when elections are round the corner. Over the years onion prices have resulted in several political parties losing elections. The last major rout was in 1998, when several BJP governments in north India were thrown out in hustings after onion prices spiralled out of control.
Interestingly, the sharp fluctuation in the price and supplies of onion symbolises the pathetic state of India’s unreformed agriculture sector. The onion has become such a volatile commodity because of the absence of reforms in the sector. Farmers are fleeced by unscrupulous middle-men, and consumers are held to ransom by traders.
Governments respond in times of crisis — when prices soar, or when farmers commit suicide — with standard measures: ban exports of the product, threaten to bring the commodity under the Essential Commodities Act, or fix minimum support prices.
Governments avoid working out long-term solutions – which are obvious – and are satisfied with such temporary bans and measures. India’s agriculture sector, growing at anaemic rates of two to three per cent, has prevented the economy from realising its full potential and expanding at double-digit rates.
One of the major factors stunting growth in the farm sector is the absence of a modern warehousing, distributing, marketing, trading, and retailing infrastructure. Many agricultural and horticultural products, including onions, are perishable commodities.
In Nashik, one of the major onion growing regions of India – located about 200 km north-east of Mumbai – farmers dump onions in the wholesale market when there is a surplus crop, desperately selling it at rock-bottom prices. There is very little storage facility for the commodity, so frustrated farmers have no options but to off-load their crops.
When this happens over successive seasons, many growers decide to abandon onion, and opt for sugarcane or other commodities that they hope would fetch better returns. Consequently, when many growers decide not to raise onions, shortages build up, leading to price rise, ham-handed decisions by the government, and a return to the crop by farmers.
ONIONS, unlike many other agricultural commodities, are cultivated thrice a year – during the winter, summer and in the monsoons. There is always a gap of a week or a fortnight, when supply-demand mismatch could lead to prices fluctuating wildly.
This is what has happened at present. Summer onion stocks have depleted in Maharashtra, Karnataka and other growing states, resulting in a temporary shortage. Many middle-men and traders – unlike state governments – are keenly aware about this, and tend to hoard the bulb, hoping to realise better prices.
Delays in the onset of rains results in the monsoon crop also getting delayed, leading to shortages. The solution is to set up warehousing facilities so that the surplus crop – instead of being dumped at ridiculously low prices – can be stored and sold when there is a seasonal shortage.
Unfortunately, most Indian farmers can scarcely afford to invest in warehouses, cold storages and refrigerated vans; it requires professional firms with deep pockets, skilled personnel, and access to modern technology to build this infrastructure. In the past, there was an ideological barrier that prevented the political class from allowing big business (including multinationals) from entering the farm sector.
Today things have changed, and the government is encouraging both domestic and foreign investors to build the necessary infrastructure. However, investors don’t materialise out of thin air at the whims and fancies of the government; prudent investors wait for the policies to stabilise, and for the few early investors to start reporting profits before taking the plunge.
The entry of organised players into the retailing sector is already causing a lot of heart-burn in the unorganised sector, and vested interests have already launched an agitation. Last week, Uttar Pradesh chief minister Mayawati – who had surprisingly initiated dramatic reforms in the retail and farm sectors – was forced to backtrack on her policies, after hooligans backed by politicians threatened to attack outlets of Reliance Fresh and Spencer’s in cities across the state.
The entry of organised retailers has brought tremendous benefits to growers of a range of commodities, and the end consumer, but unscrupulous traders – who squeeze both farmers and consumers – have started feeling the pinch. A backlash can be expected over the coming months, especially with elections round the corner.
Parties like the Bharatiya Janata Party (BJP), which gets tremendous backing from petty traders and shop-keepers, is spoiling for a fight with the government, while others like the Samajwadi Party (SP), which was defeated in the recent assembly elections in Uttar Pradesh, are also gunning for the ruling parties.
The leftists, who are surprisingly quiet about the growing popularity of Wal-Mart and other international retailers in China, are also vehemently opposed to the opening up of the sector in India. But millions of consumers in cities across the country have voted overwhelmingly in favour of organised retailers, as evident at the string of shopping malls, hypermarkets and supermarkets, on most days, but especially on weekends, when buyers throng the fancy new retail outlets.
WITH onion prices soaring over the past few days – it has jumped to a high of Rs18,000 a tonne, as against a mere Rs3,500 last year around the same time – the government has once again started fiddling with the export price.
The Minimum Export Price (MEP) has emerged as a new tool for the government to play around with every time onion prices fluctuate. But in the bargain, it has tarnished the credibility of Indian exporters in the international markets.
The MEP is basically a price control tool, which was introduced about three years ago after the government pulled onion out of the essential commodities list. The past four months has seen the government fiddle around with the MEP about eight times, trying to keep a check on domestic onion prices.
Most of India’s million-plus tonnes of exports are destined to the Gulf markets. Both India and Pakistan are major exporters of onions to the Gulf, and shortage of onions in one country is met with extra supplies from the other.
However, to curb the export of onions from India, the government recently hiked the MEP by $100 a tonne to $445. The National Agricultural Cooperative Marketing Federation of Indian (NAFED) fears that the frequent changes in the MEP will upset the export targets; India’s onion exports are likely to dip by over 10 per cent this year because of the change in prices.
The MEP was around $240 in May, but has been hiked by about $200 in the past three months. Once the monsoon crop starts flooding the market, domestic prices will crash, and the government will again be forced to reduce the MEP. But this kind of manipulated price hikes and declines does no good for the credibility of suppliers in international markets, and many of the buyers would shift to more reliable suppliers than India, it is feared.
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