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This is a homemade, artificial crisis

There is more to onion prices than what meets the eye. Despite no shortfall in production, the prices are rising because the government is unwilling to act against traders. Markets are willfully manipulated, writes Devinder Sharma.

india Updated: Sep 20, 2013 03:19 IST

With the assembly elections nearing, the Centre has finally got cracking. It has directed the states to come down on hoarding that is driving up onion prices. This is perhaps the longest season when onion prices have remained abnormally high — from July to mid-September — and is expected to last until the first week of October.

Knowing that simmering anger among consumers can upset poll calculations, the ministry of consumer affairs, food and public distribution has been forced to act. More so, considering the spike in onion prices has spread to all other vegetables, except the potato. While onion prices have hit Rs. 80/kg, no other vegetable is available at less tha Rs. 40/kg even though we had a more-than-bountiful monsoon.

There is more to onion prices than what meets the eye. First of all, let’s be clear that raging food inflation is a reflection of the market economy: prices of all commodities, across sectors, have been steadily rising. Take the case of housing and real estate. The unprecedented rise in land prices and the phenomenal jump in prices of built residential houses/flats too defy any economic rationale. The cartels operate everywhere. Try making an online purchase of an airline ticket. If you click on a particular route more than three times, the ticket price goes up. But we never complain. We have accepted the hikes, and absorbed them. We only scream when food prices go up.

Here is how the government manipulates inflation data. Knowing that it is invariably food prices that pinch the average consumer, the government had, some years back, quietly modified in its calculations the system of according weights to different products. It reduced the weights for food items, and added more weights for consumer products like refrigerators, air-conditioners etc. Even with these highly distorted parameters, food prices in the wholesale price index for August showed an increase. Interestingly, food inflation as measured by the consumer price index showed a decline in the same period.

Now let us look at the trade. Unlike other vegetables, onions have a longer shelf-life. So the trader knows it pays to manipulate the prices. Reports point to how the wholesale traders have bought onion from growers at approximately Rs. 8/kg in April-May and stacked them at numerous places around the Nasik region, the epicentre of onion production in India. A handful of big wholesale traders, who control the supply side, manage to create an artificial shortage. This is exactly what was done in 2010 when prices had shot up unexpectedly. Production exceeded the demand by about 20% , and yet the onion prices had shot through the roof.

This year too, there is no significant shortfall in production. With production falling by a mere 4% there is no justification for retail prices to go up by upward of 400%. An investigation by a newspaper showed how the traders made a neat Rs. 150-crore in just four days when prices peaked at Rs. 4,500/quintal on August 13. Even the Agriculture Produce Marketing Committee in Nasik has acknowledged that more than 2.5 lakh tonnes of onion were available with farmers in 66 villages of Lasalgaon.

Onion prices have also remained high in the organised retail chains. These chains were supposed to buy directly from farmers, and so the prices should have been lower. Replacing one set of middlemen with a more sophisticated one is not the solution. Both exploit gullible consumers as well as farmers. What the trade needs is a stern deterrent action. The Essential Commodity Act is sparingly used, allowing the trade to go for a killing. After all, in a market-based economy, markets are supposed to make a correction. This is a wrong assumption. Markets are not like seasons, these are willfully manipulated.

Devinder Sharma is a food policy analyst The views expressed by the author are personal