Peeling the Multi-layered Onion Economics

New Delhi, December 14: The onion has been a part and parcel of Indian cuisine. But from the last few days, intractable prices of onion has been in the centre of debate on inflation and economic slowdown. Even as the Reserve Bank of India (RBI) was having its monetary policy meet, economists from Harvard and Oxford were forecasting the apex bank’s steps in controlling inflation. The Bank of America gave a straight and simple advice - to have a look at India’s onion prices.

While there has been much ado about the spurt in prices of this commodity and every channel is broadcasting teary-eyed wailing housewives, the government has jumped into action by importing onions from other countries to control the price.

Historically, onions have been instrumental in bringing down governments. Delhi and Rajasthan state governments fell in 1998, thanks to high onion prices. In fact, high onion prices in 1980 helped Indira Gandhi come back to power in the Centre through what was popularly termed as  “onion election.”

On Tuesday, the Minister of Consumer Affairs, Food and Public Distribution Ram Vilas Paswan in Lok Sabha said that the prices of onion have increased by over 400 per cent since March 2019. 

A Monetary Policy Committee is mandated to maintain inflation at four per cent with a two percentage point band on either side. However this model is grappling with the same old problem of food prices. October consumer prices rose by 4.68 per cent, highest in 18 months, which happened two months ago.

A look into onion economics

If you trace the price pattern or Wholesale Price Index (WPI)  and Consumer Price Index (CPI) of onion since January 2016, you will easily understand the convoluted upward and downward cycle.

One important thing, the WPI inflation for onions has been generally higher than its CPI inflation.According to a report by Care ratings, “There appears to be a pattern of price inflation moving into negative territory subsequently and then increasing sharply to cross over 100 per cent - came close to 200 per cent in December 2017 before coming down sharply into negative inflation the following season. The increase in inflation to 120 per cent going by the WPI in October 2019 is a part of the new upward cycle.”

In this report, the reason attributed for this jerky and unstable cycle is when crop fails and prices rise sharply, there is a tendency for farmers to cultivate higher spread of land, which leads to over-production and consequently leads to prices coming down. When prices come down they tend to fall by over 50 per cent thus causing considerable volatility in price movements.

Onions have a share of 0.16 per cent in WPI and 0.64 per cent in CPI. The report said, 100 per cent increase in prices can lead to a proportionate increase in the indices which in turn has a bearing on overall inflation and finally on monetary policy outcomes. 

There is also a contribution coming from hoarding, as speculators tend to step in and block supplies to further push up prices. This has led the government to introduce stock limits on holding of onions. Earlier this week the government reduced the stock holding limit for onion to 2 tonnes from 5 tonnes for retail traders. Last week, the government had reduced the stock holding limit for retailers to 5 tonnes from 10 tonnes while that on wholesalers to 25 tonnes from 50 tonnes.

Way Ahead

Taking cognisance of exorbitant prices of onion, the central government has given its approval to import of 36,090 metric tonnes of onions amid the ongoing supply crunch. Of this, 21,090 metric tonnes of onions are already contracted, which includes 6,090 metric tonnes from Egypt and 15,000 metric tonnes from Turkey, while the government will issue tenders for 15,000 metric tonnes of onions. The country had last imported 1,987 tonnes of onion in FY16, which happens to be the only year India imported onions in the last five years.

But the issue with imports is that there are processes to follow such as floating tenders and making amendments in the clearance laws relating to phytosanitary and fumigation conditions. Now, the state-run trading firm MMTC has already floated a tender for buying 21,090 metric tonnes (MT) of onions from Turkey and Egypt and the shipments are expected to arrive mid-January

Under the present circumstances an option is to wait for the next crop in January, which will ease prices, as there are no signs of sub-optimal output in the late kharif crop as yet.