Rising price of onions - Atasi Das

India’s food inflation clocked 18.32 per cent on 25 December 2010 – nearly the highest in the year-propelled mostly by a hike in onion, vegetable and milk prices. Onion and vegetable prices rose by over 82 per cent and 58.85 per cent respectively, in the concerned period. Wholesale food inflation stood at 14.44 per cent in the week ending 18 December 2010.

The price trail…
In December end, onion prices in Kolkata hovered around Rs 50-60 per kg; retail price in Delhi was Rs 80 per kg. In Maharashtra (India's biggest onion producing state) and the southern cities of Bangalore, Chennai and Hyderabad prices were in the range of Rs 70-80 per kg. Abnormal rainfall had damaged crops in Maharashtra.

On 8 January 2011, onion retail prices continued to be high at Rs 60-65 per kg in the metros, but wholesale prices declined following nationwide tax raids on traders; wholesale rates for Delhi and Mumbai were Rs 40 per kg and Rs 45 per kg respectively and Rs 50 per kg for Kolkata and Chennai. New supplies had arrived from the states of Maharashtra, Gujarat and Rajasthan. Maharashtra and Karnataka account for 40 percent of India’s average onion annual output of 12 million tonne. India’s total onion production is projected to be 10.5 million tonnes for 2010-11.
Fresh onion crops are expected in the markets from Maharashtra and Gujarat by mid-January and from Nashik and Bijapur in early February (to cater to the shortage in the southern states).

Factors responsible for the crisis
Partly responsible for the inflationary situation is the package of expansionary fiscal measures (like augmented money supply, public expenditure and lowered tax rates) introduced by the government in 2008, to combat the aftermath of the global financial meltdown. The expansionary fiscal policies have inflated India’s fiscal deficit and nurtured the “unstable price regime”. India’s burgeoning urban middle class with growing purchasing power has stoked demand pressures in the last three years; rural income has also increased significantly on the back of various government sponsored employment generation schemes. On the supply front, agricultural productivity has not increased substantially; the supply chain is far from modernised. Poor transport and storage facilities and presence of multilayered intermediaries lead to wastage, short supply and overpricing of food grains. Late monsoons have led to lower than expected onion harvest in Maharashtra, Rajasthan and Karnataka. The wholesalers and the retailers have blamed each other for charging export price of onions for the domestic market, taking advantage of the poor harvest and unregulated pricing mechanism.

On 6 January 2011, the Pakistan Ministry of Commerce stopped its onion export to India via the Attari-Wagah land route, citing rising prices and supply shortage in its domestic market. The Pakistan ban on exports has also driven up onion prices.

The government action
The ravaging food inflation has prompted some knee-jerk action from the government: for the time being, urea price decontrol attempts have been stalled, despite a hike in the global crude oil prices, the government has ruled out any rise in domestic diesel and cooking gas prices.
The Reserve Bank of India (RBI) is likely to increase the key policy rates in its upcoming 25 January policy review –this will increase the commercial bank lending rates.

While the government is trying to coax Pakistan to resume its full quota of onion exports, Finance minister Pranab Mukherjee has asked the state governments to improve their supply chains for controlling the spiraling food prices. Markets in Uttar Pradesh, Punjab, Jammu and Kashmir, Haryana and Chandigarh have come under the Income Tax scanner for singling out hoarders responsible for creating artificial shortage. The Competition Commission of India is investigating the role played by the nationwide cartel of onion traders, for driving up the price through artificial shortage. Media reports point to an unholy nexus between the politicians, traders, middlemen and retailers behind the crisis. Pranab Mukherjee has attributed the soaring prices partly to the rising global commodity prices. In a bid to curtail prices and augment domestic supply, the government has banned onion export and scrapped import duty on onions. The Lucknow district administration had even taken recourse to selling onions through fair price shops.

The global connection
The developing nations worldwide are suffering from persistent food inflation. As per a United Nations index, food inflation reached an all-time global high in December 2010. Developed countries like the US, Japan and Europe meanwhile recorded low inflation - a reflection of their sluggish economic growth. The apex banks of the BRIC countries- Brazil, Russia, India and China- have all hiked interest rates in recent times to suck in the excess liquidity in the system (responsible for fuelling the inflationary pressure). The trade-off is that high interest rates pull down private investment, which chokes growth. Weather conditions have also hampered crop productivity and pushed up international food prices. The G20 forum has taken up the issue of soaring global food prices, which is threatening the socio-economic stability of emerging nations. The hike in the global crude oil prices is likely to affect the Indian economy, by augmenting the cost of cultivation, as it will push up fertiliser and diesel (needed for irrigation) prices and will also increase the transportation cost and other associated indirect costs.

Analysts predict that a ‘better-than-expected’ US recovery may also fuel global inflation, by creating a demand surge in the global supply chain, thereby sending into overdrive the developing economies already running at full capacity.

Conclusion
The International Monetary Fund has projected India's economic growth to be 8.75 percent for the year ending 31 March, but inflation is eating away into the economic gains of India’s salaried class and her marginalised population. Experts are worried that, the sustained high food inflation may lead to the building up of inflationary expectations among the people and undermine the credibility of the apex monetary authority. We can conclude that short run policies will not offer a permanent solution to the supply side problems behind persistent food inflation – side-by-side prudent demand management and a calibrated monetary policy approach is the need of the hour.