BackThe making of a tearful episode
India has seen periodic spikes in onion prices. But instead of action, the government has peddled excuses
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Data on consumer price inflation released by the ministry of statistics has put to rest any hopes that prices will cool down in the near future. Inflation, based on consumer prices, accelerated from 10.56% in December to 10.79% in January. Inflation in rural areas was 10.88% and stood at 10.73% in urban areas. This will not surprise anyone who considers retail inflation above 10% as normal. This has been the case for more than four years with food inflation remaining close to double digits for most of this period. This time, too, food price inflation based on retail prices is 13.13% with vegetables showing an inflation rate of 25.35%.
Within the vegetables group, a significant contributor is the usual suspect, onion. Onion prices have increased by more than 35% since December and are more than double the prices for the same month the previous year on a year-on-year basis. This, incidentally, is the second time during this government’s tenure that onion prices have galloped ahead in this manner. The last time this happened was between December 2010 and January 2011, when the retail prices of onion hovered around 70 per kg in Delhi markets.
There is an uncanny similarity in the reasons offered by the government for the increase in onion prices this year and in previous years: poor rains and late sowing. While this may have been the case today—for 2012 was a drought year—2010 was, clearly, a normal year. The reasons for the increase in onion prices had less to do with supply shocks than with inefficiencies in the onion wholesale and retail market and the loopholes in the Agricultural Produce Market Committees (APMC) Act. The latter permits collusion and cartelization between large traders. Of course, hard evidence of this is not available. But the mere fact that just two days after a raid (on 7 January 2011) on some of the biggest onion traders in Maharashtra by the income-tax department, prices came down by 60% is suggestive of cartelization and hoarding that led to the unprecedented price rise.
Incidentally, one government body was aware of this and initiated an enquiry. This was by the Competition Commission of India (CCI). However, despite mounting evidence, the enquiry did not make headway allegedly on the pretext that prices of onions are discovered through auctions and, as there are no entry and exit barriers, there could not have been any cartelization. The matter ended then and there with a dissenting order by one of the members.
Thanks to the persistent efforts of one member of CCI, who ordered an independent enquiry in the issue, matters are being clarified. Last month, a report submitted by the Institute for Social and Economic Change, Bangalore to CCI concluded that there is great degree of inefficiency in the way onion markets operate and that the last instance of price rise in 2010-11 was less due to supply shocks and more due to inefficiency, including collusion and cartelization. The study, based on secondary data as well as a primary survey of agricultural mandis in Maharashtra and Karnataka, concluded the onion market not only suffers from a lack of competition with barriers to entry but that farmers have a minimal role in influencing prices.
The study points out that the retail mark-up over wholesale prices during December 2010 was as much as 150% with traders cornering most of the gains from inflation in prices. Notably, the report confirms collusion and cartelization among a small group of influential traders. As the dissenting order of the CCI (suo-moto case number 01/2011, order dated 10 April 2012) also notes, 7.2% to 20.64% of the onion trade during December 2010 was accounted for by just one trader. All this happened because the onion trade is still regulated and the APMC Act, instead of facilitating competition, encourages cartelization. A clear case of an entry barrier is the fact that average experience of a commission agent in the surveyed mandis was 20 years.
It was, however, not just the traders who took advantage of a sleeping government, but the government also actively contributed to creating a shortage in the domestic market. Even though the government was aware of a possible production shortfall due to unseasonal rainfall in August and September 2010, it permitted onion exports of 104,000 tonnes as late as October 2010, just before the inflationary spike.
Incidentally, the story this time round is not different. Early estimates by the government ruled out a decline in production despite a decline in the area under cultivation. So much so that it has already allowed exports of onion to the tune of 1.3 million tonnes during April-December 2012, up by 17% from the last year. Why did the government allow exports to continue if it anticipated a shortfall in production?
More importantly, even though anecdotal reports suggest hoarding and cartelization playing havoc this time around too, the government continues to be in denial. It is sad that not only did it scuttle an enquiry and follow up action by a regulatory agency (CCI); it has not learnt any lessons from the previous experience just two years back.
Himanshu is an assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.
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