The price of onions, an item of mass consumption and hence politically sensitive, surged in the last few weeks. They are trading at around Rs.1,650 to Rs.1,700 a quintal in the benchmark Lasalgaon market in Nashik, up from around Rs.1,200 in the first week of January.
This has also served as a reminder of the inability of the Congress-led United Progressive Alliance (UPA) government to contain inflationary pressures.
Though the government maintains the price increase is “seasonal” and will drop in the next two weeks, political experts said the increase in the price of onions together with current levels of high food inflation could affect the electoral prospects of the ruling party, which is preparing to bid for a record third consecutive term in the next general election.
The increase in diesel prices after the government’s decision to de-regulate the fuel will also contribute to spiralling prices, said an official in the agriculture ministry. Concerned over the possibility of prices rising further, the ministry had discussed the issue with various stakeholders.
“This price rise is just seasonal. We are assessing the situation and prices are expected to be stable within 15 days,” food and consumer affairs minister K.V. Thomas said. He, however, added that the government will intervene if they don’t come under control. “The government can make adjustments in import/export duties to manage supply,” he added.
NCAER has estimated onion production will fall to 13.6 million tonnes (mt) in 2012-13 from 15.7 mt in 2011-12, amid expectations of robust local and overseas demand.
Traders estimate a production decline of 35% and 25% in Maharashtra and Karnataka, respectively. Maharashtra, Gujarat, Karnataka and Uttar Pradesh are some of the major onion-producing states.
A similar spurt in prices in 1998 hurt the electoral prospects of the Bharatiya Janata Party (BJP) in Delhi state. The Congress has ruled the state for three terms in a row since the BJP defeat that followed.
India is the world’s second largest producer of onions after China, and onion is the second largest consumed vegetable in India after potato.
The rise in onion prices will compound political problems faced by the Congress-led UPA coalition at the Centre, especially in managing inflation, said Bidyut Chakrabarty, professor of political science at Delhi University.
While inflation based on the Wholesale Price Index slowed to 7.18% in December from 7.24% in November, retail inflation crossed the double-digit mark at 10.56% in December, mainly on account of higher vegetable prices. Retail inflation was at 9.9% in November.
“It is likely to disrupt government, because it affects the poorest of the poor, who strongly influence the electoral outcome,” Chakrabarty said. “The government does not seem to be having control over the prices of essential commodities now.”
The UPA may be hurt by the perception that recent policy changes—including the allowing of foreign direct investment in multi-brand retail—will be beneficial only for the middle and upper class, he said.
Onion prices rose 17% in November and 69% in December last year, mirroring a similar trend in 2010, prompting the Competition Commission of India to inquire into the possibility of cartelization among onion traders at the time.
Economists said the increase in vegetable prices will put pressure on food inflation.
“Onion prices have recorded a sharp increase in month-on-month terms in November and December 2012. Supply disruptions following the extreme cold conditions in parts of north India in the first half of January 2013 may result in a temporary spike in prices of perishable products such as vegetables and fruits,” said Aditi Nayar, senior economist at rating agency ICRA.
Food inflation has picked up in the last two months, partly due to the base effect. In December 2012, food inflation was in double digits at 11.2% against 8.5% in the previous month.
“Food inflation is likely to continue to impart some stickiness to the overall inflation in the medium term,” she said.
The pass through of the diesel price increase will boost headline inflation in the coming months, Nayar added.