Wednesday, October 23, 2013

Onion price puzzle can not be solved without a vision.

Onion prices are once again on fire. Just before Diwali  festival it is inching to cross the mark of Rs 100 per kg.  Earlier in August this year onion had a steep rise in retail prices by almost 25% in a fortnight. Thus from the base of July price of ,once the  food for poor has almost doubled.

In August the government had termed that a temporary phase and had made claims that the problem will get resolved soon with arrival of new crop in the market. By end of September some correction was seen, but not only the relief got evaporated soon it escalated far ahead to touch new heights.
Commerce minister Anand Sharma blamed hoarders for the spike in onion prices and put blames on the state governments.  He forgot that Maharashtra which has largest share of 28% on supplies is ruled by UPA. Kharif  crop comes from Andhra Pradesh and Karnataka again no need to tell who
rules there.  Civil supplies minister of Delhi Haroon Yusuf also joined band wagon and alleged that hoarders were keeping supplies from reaching Delhi to sabotage Congress's prospects in the assembly elections.   In September theory put forward was that dwindling supplies have caused this havoc.

Supplies of onion in the market are low due to several reasons and needs to be understood for corrective steps.

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.  On Tuesday, the average wholesale price of the new crop at Lasalgaon was Rs 3,900 a quintal as reported by TOI. However, retail prices in different places are Rs 80-90 per kg. The huge gap of Rs 25-40 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.
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