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An old law that’s ironically driven up onion prices

Basically, bad weather led to a disruption in supply, which sent prices soaring. While that is the real reason for the rise in onion prices, there is a little more to it than that. Mint takes a look

High onion prices have had people across India worried over the last few months. Basically, bad weather led to a disruption in supply, which sent prices soaring. While that is the real reason for the rise in onion prices, there is a little more to it than that. Mint takes a look.

High onion prices have had people across India worried over the last few months. Basically, bad weather led to a disruption in supply, which sent prices soaring. While that is the real reason for the rise in onion prices, there is a little more to it than that. Mint takes a look.

How high have prices of onions risen?

How high have prices of onions risen?

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In December, onion prices rose more than threefold (see graphic) from a year earlier. This was the highest increase in onion prices in a period of five years. Even in November, onion prices had shot up 146%. The Economic Survey of 2019-20 holds the Essential Commodities Act (ECA), 1955, responsible for this. The Act “controls the production, supply and distribution of, and trade and commerce in, certain goods such as vegetables, pulses, edible oils, sugar, etc., which are treated as essential commodities". The state governments have the power to implement the provisions under the Act.

What does the Act do when prices shoot up?

When prices of an essential commodity, like onions, go up, state governments can impose stockholding limits. This leads to a situation where wholesalers, distributors and retailers dealing in the essential commodity need to reduce the inventory that they hold in order to meet the requirements of a reduced stock limit. The idea is to curb hoarding, maintain an adequate supply of the essential commodity and, thus, maintain affordable prices. This is where the law of unintended consequences strikes. Instead of ensuring prices of the essential commodity remain affordable, ECA makes it expensive.

Graphic: Sarvesh Kumar Sharma/Mint

What is the law of unintended consequences?

As Vijay Kelkar and Ajay Shah write in their book In Service of the Republic: “A government intervention that is intended to have a certain outcome will very often end up yielding a very different result. Such failures happen so often that these have been elevated to the level of a humorous ‘law’." This law has had a huge role in driving up onion prices.

How has this law sent onion prices soaring?

Heavy rains in August-September ensured that the kharif crop of onions was badly affected. This meant that the supply of onions would be impacted. The kharif crop caters to the demand for onions between October and December. On 29 September, stock limits under ECA were imposed to maintain supply. The idea was to ensure onion prices did not go up. Stock limits would ensure that onion stocks would be released into the open market and the supply would go up, ensuring prices remain affordable.

That was theory, what happened actually?

As the Economic Survey points out: “In the case of onions… most of the kharif crop… would have had to be offloaded in the market in October itself. Absent government intervention through ECA, traders would store a part of their produce to ensure smooth availability of a product at stable prices throughout the year." Of course, the law of unintended consequences struck and that did not happen, driving up onion prices in the process.

Vivek Kaul is an economist and the author of the Easy Money trilogy.