The great onion price paradox

The absence of genuine competition at mandis and numerous transaction charges are distorting onion prices
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First Published: Fri, Aug 16 2013. 01 33 PM IST
The latest WPI numbers released on Wednesday show that onion prices rose 144% in July over the year-ago period, after a similar increase in the previous month. Photo: Abhijit Bhatlekar/Mint
The latest WPI numbers released on Wednesday show that onion prices rose 144% in July over the year-ago period, after a similar increase in the previous month. Photo: Abhijit Bhatlekar/Mint
Updated: Sun, Aug 18 2013. 07 49 PM IST
The joke doing the rounds today is that the spike in onion prices has been a great equalizer, bringing parity between the price of a bottle of beer and a kilo of onion. The humble vegetable has also found pride of place as a gift item to customers at a tyre shop in Jamshedpur, according to a Press Trust of India (PTI) report. Offering onions free with tyres was Satnam Singh Gambhir’s way of protesting against a government that has been unable to curb the price increases, the tyre-seller said.
Across cities, onion prices are hovering at anywhere between Rs.50 and Rs.80 a kilo, nearly double last month’s levels. The latest wholesale price index (WPI) numbers released on Wednesday show that onion prices rose 144% in July over the year-ago period, after a similar increase in the previous month. Since January, onion price levels have been nearly double what they were a year ago.
The persistent increase seems to be finally ringing alarm bells, with state governments across the country fighting to bring down prices. Higher onion prices have not only added to high food price inflation, but also rattled governments over the years, for example contributing to the defeat of the Bharatiya Janata Party (BJP) in state elections in Delhi in 1998. Hence the alarm! Yet, the political response this time has been as myopic as in the past. Politicians seem to be demanding everything ranging from a ban on exports to special subsidized shops in urban hubs but barely speaking about what is actually needed: a structural solution to tame price volatility in commodity markets.
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While seasonal fluctuations in output may have played a role in curtailing supplies to the mandis (or wholesale markets), the rot is deeper. Chart 1 shows a sharp and steady increase in onion prices over the past few years. The onion price index has outpaced both the overall food price index and the overall wholesale price index over the past few years.
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And as Chart 2 shows, this increase in prices has occurred despite an unprecedented increase in yields and onion production over the past decade. From the mid-1970 till the late 1990s, onion yields stagnated between 10 and 11 tonnes per hectare even as production doubled in the country because of increased acreage, according to data from the National Horticulture Research and Development Foundation (NHRDF). The rise in onion prices was roughly equal to the average food inflation during this period. In the 2000s, onion production increased more than three folds owing to a nearly 50% improvement in yields, and a doubling of acreage. Yet, onion prices ran ahead of the overall food basket precisely during this phase.
What explains this paradox? The answer is a bit long, and those interested may want to read Mint’s in-detail report on the story of Asia’s biggest onion market at Lasalgaon in Maharashtra, and the clutch of traders who control it.
To provide the gist, a handful of traders have come to dominate wholesale markets such as the one at Lasalgaon. The archaic agricultural produce marketing committee (APMC) laws that govern the sale of all agricultural produce in the country today serve to protect the interests of trader cartels rather than protecting farmers’ interests. The traders belong to a close-knit community that has adeptly used its financial muscle to build powerful political networks to secure its interests and thwart reforms. This is only one part of the story though. Agricultural economist P.G. Chengappa of the Institute for Social and Economic Change (ISEC) who led a team to investigate the volatility in onion prices, found that the entire range of intermediaries comprising the commission agent, wholesaler, transporter, storage chain owner, and even the railway agent, usually belong to the same family. And often, the links extend till the last mile, allowing a small group of traders extraordinary influence over both wholesale and retail prices.
In Maharashtra, the largest onion producer, senior government officials have often stressed the need to curb the influence of traders, but have stopped short of breaking their monopoly by opening the doors of commodity markets. Maharashtra’s case is not unique. Across the country, the absence of genuine competition at the mandi and numerous transaction charges distort prices, and the lack of viable alternatives to the mandi limits investments in better infrastructure, causing prices to spike despite gains in production.
Until commodity markets are liberalized, onion prices will keep bringing tears to the eyes of homemakers.
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First Published: Fri, Aug 16 2013. 01 33 PM IST
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