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Peel the onion

At one level, the political sensitivity to the bulb doesn't quite make sense. Onions are a staple but they aren't essential. Nobody starves if they do without onions. Devangshu Datta writes.

india Updated: May 21, 2011 22:47 IST
Devangshu Datta

Since pre-history, allium has possessed the power to drive men to tears. The first tentative attempts to limit its destructive potential were made during the Vedic era. In a vast sociological experiment, the Aryans classified this naturally occurring substance as a dangerous drug and advocated that its consumption be shunned by all right-thinking members of the upper castes. It was alleged to cause "heat in the stomach" and to promote unbridled lust, especially among widows.

Unfortunately, the vast majority of the population at large proved to be neither right-thinking nor upper caste in its tastes. Then as now, the world remains addicted to the onion and its cousins, like the shallot and the leek. Allium cepa and its variants feature in every world cuisine. It is eaten, cooked or raw, or used as seasoning, across the length and breadth of the planet. This is why, every so often, it displays the power to drive politicians out of office.

In 1980, Indira Gandhi wore necklaces made of onions, rather than rupee notes or diamonds, on her triumphant comeback campaign. She wanted to emphasise the point that the Janata government had failed to control onion prices, thus causing hardship to the 'mango man'. In 1998, the BJP lost control of Delhi state as a direct result of onion prices having multiplied 650% in an election year.

The current administration is a little luckier simply because elections are some years away. But the situation is more or less as bad as the winter of 1998-99 with regards to onion inflation. Prices have roughly quadrupled in the past two months.

This spike in prices is due to unseasonal rain having hit the onion crop in Maharashtra and thus, caused a shortfall in supply. Exports have been banned. Frantic and apparently successful attempts are now being made to import the veggie in an attempt to force prices down again.

Again, in analogy to 1998, India's diplomatic relations with Pakistan have actually improved to the point where its western neighbour is prepared to supply onions against hard currency payments. A decade ago, Pakistan opted to attack Kargil instead.

At one level, the political sensitivity to the bulb doesn't quite make sense. Onions are a staple but they aren't essential. Nobody starves if they do without onions. In fact, Brahmins of many communities, practising Jains and some Buddhists, won't touch it at any price. But food just doesn't taste the same if your palate is used to the onion and you're forced to miss out.

The price sensitivity to a small shortfall in supply does, however, make a great deal of economic sense. Like with most staples, demand for onions is not very price-sensitive. Let us say, the average person consumes one onion per day (OPD). If the price doubles, he will grumble but pay a larger grocery bill in order to continue consuming his OPD. Conversely if price halves, he will not pig out and eat two OPD.

For such necessary goods, where demand remains almost constant for a wide variation in price, a small change in supply can cause huge price fluctuations. That is what is happening now. Some estimates suggest that the shortfall is around 1 million tonnes. India produced 8.2 million tonnes of onions in 2008, according to the Food and Agriculture Organisation (FAO), and it exported around 1 million tonnes.

Fudging those numbers and allowing for the ineffectiveness of export ban mechanisms, the current domestic demand-supply gap is possibly as large as 15 %. Due to the unwillingness of the consumer to make do with 0.85 OPD, prices have gone up 350%.

Nor is this an entirely desi weakness. In 1958, the United States banned trading in onion futures because it had weird price patterns and was susceptible to manipulation. That ban remains in force. It has been at the centre of several academic studies, about the impact of futures trading on agro-commodity prices.

Obviously, the invisible hand of the relatively free US agro market didn't work very well at managing the onion demand-supply equation. Nor did the rigid rationing systems of India, circa 1980. Nor does the somewhat less rigid and somewhat more market driven mandi of today.

There isn't much the Indian government can do beyond what it has already tried to do. The public distribution systems (PDS) are too erratic and the import agencies are too inefficient. Ideally, an efficient government with an efficient PDS and efficient import agencies would have imported and sold onions directly from temporary stalls in mandis, competing directly with retailers.

Imports, and the promise of more imports, have already forced wholesale prices down dramatically. It will take a while to impact retail prices. Right now, hoarding makes sense since the retailer hopes to chisel excessive profits. But as supply grows, hoarding will inevitably become a losing strategy.

Prices will slide as dramatically as they rose. But the rise took a couple of months and the fall will probably take another month. Next year, we're likely to have a bumper onion crop and low prices (as in 1999-2000) because everybody who knows their onions would hope for a repeat. So archive all the bhaji recipes that have become so expensive and wait for next December.

Devangshu Datta is a Delhi-based financial analyst. The views expressed by the author are personal.