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Food inflation: How to decode the onion price puzzle-Usha Tuteja
-The Economic Times


It is ironical that food inflation surged to around 18% in August when agriculture is the primary hope in the economy. The culprit was mainly vegetables and, within that, onions.

Onions are once again in the news due to steep rise in retail prices by almost 25% in a fortnight. Safal outlets in Delhi have set the price at Rs 60 per kg whereas some other retailers are charging Rs 70-80 per kg from consumers. Even weekly markets are unable to provide respite to consumers. There is a general feeling that dwindling supplies have caused this havoc.

Supplies of onion in the market are low due to several reasons. First, planting this year is less than last year's because growers could not cover their cost in major growing areas. Second, kharif onion sowed in the southern states was partially damaged due to occasional rains. Third, the Nafed, responsible for managing demand and supply, has not taken timely action.

Fourth, arrivals from Maharashtra, a major producer of onions, are low because traders are hoarding the commodity in anticipation of better prices, while other growing areas, Andhra Pradesh and Karnataka, are unable to fill the supply gap from Maharashtra because of high moisture content in the new crop. Fifth, the weakening rupee has augmented profits on exports despite the imposition of minimum export price of $650 per tonne.

Consequently, around two lakh tonnes less of onions was kept in cold storages while exports increased by six lakh tonnes during the last few months. The government expects that price of this politically-sensitive commodity will moderate from October after the arrival of new onion planted in kharif season in Andhra Pradesh, Karnataka and Tamil Nadu. However, some analysts feel that the onion prices will not cool down due to relatively low acreage, partial damage of production by rains and attractive export price.

The wholesale price of onion in growing states is Rs 45-50 per kg. However, retail prices in different places are Rs 70-80 per kg. The huge gap of Rs 25-30 per kg in wholesale and consumer prices implies a margin of more than 50%. After subtracting the cost of logistics, 10-15%, the difference in cost price and selling price is still high.

A huge markup is taking place in the retail chain and traders are cornering huge profits. Onion prices have had a tumultuous political history and, therefore, the government is trying to control the price rise. It could impose an export ban or revise the minimum export price upwards and limit stocks for traders. However, these short-term measures would have a limited impact on prices and in solving long-term problems related to production and marketing of this essential commodity.

It seems that government agencies like Nafed are unable to efficiently monitor price rise regularly in the domestic market. Also, it does not take timely remedial action when there is a probability of a major shortfall in supply. So far, the government does not have any effective regulatory cell to monitor and foresee such abrupt increase in prices of essential foodstuffs with inelastic demand.

The issue of rising onion prices is symptomatic of a longer-term problem, which requires serious thought and quick action in food management. Warnings of a spurt in onion prices have been in the public domain for the last 3-4 months but the government has not responded with the required urgency.

Some speculation and hoarding must be taking place. But blaming only these for the price rise does not seem logical. Economists and the media have been alerting policymakers on this subject. A review of the causes of onion price rise needs to differentiate between long-run and short-run shortages since each has to be tackled differently.

The demand and supply gap is a major factor that needs deeper probing. The onion price rise is not an overnight phenomenon and cannot be attributed merely to reduced market arrivals from the major growing states. Rather, it is the result of production not keeping pace with demand, inefficient retail chains and lack of regulation in the form of a cap on consumer prices of food commodities.

(The writer is acting director, Agricultural Economics Research Centre, University of Delhi)