Aug 23, 2013

Let's chop the onion cartel

Every time onion prices hit the roof, or for that matter, whenever food inflation inches upwards, it is amusing to see economists invariably pointing to supply-demand constraints and the urgent need, therefore, to modernise the supply chain. And that has always left me wondering why economists can never see beyond the fundamental prescription enshrined in the economic textbooks. It doesn’t always hold true.

The onion crisis is no different. At a time when the electronic media was screaming at the top of its voice, I heard many an economist, who had probably never been to a crop field, repeating ad nauseam what they had been taught in their classrooms.

Onion prices had hit a two-and-a-half year high in August at the back of fears of a drop in production in key areas because of drought last year, and in some areas, the heavy rains turning to be a spoilsport. The emphasis, therefore, was on the need to streamline the supply chain, with some newspapers even suggesting irradiating the vegetables to extend its shelf-life.

From a maximum of Rs 10 per kg in June, onion prices had shot up to Rs 70-80 per kg in a few weeks, finally stabilising at Rs 50-60 when the government announced a slew of measures, including imports and quantitative restrictions on exports. Although Union Agriculture Minister Sharad Pawar had said that prices would remain high until October when the new crop comes in, strangely the wholesale prices began to soften to coincide with the announcement of import-export measures.

This is not the first time the onion trade has played truant. In December 2010, onion prices were on fire. Even prior to that, onion prices had flared up for three years in a row between the months of September to December. And I had always maintained that barring some seasonal variation, there was no reason for onion prices to soar by 400-500 percent. Even this year, the production shortfall has been anticipated at a mere 4 percent and the prices have gone up by as much as 600 percent on an average. How can this stupendous price hike be attributed to supply-demand constraints?

For several years now, I have been saying that the extreme volatility in onion prices (and also that of other vegetables/ fruits) is the handiwork of a cartel that operates in the wholesale trade. A handful of trading families have cornered the entire trading activities, thereby very conveniently manipulating the market. Large-scale hoarding of onions goes on unchecked.

The reason is obvious. No political party wants to ruffle the traders with any stringent action. Traders hold the strings to the political purse, and a crackdown against hoarding and speculation would mean chopping off the financial cord.

It is not that cartelisation operates only in agriculture. Take the case of airlines. You click three times on a flight route on the Internet, and the ticket price goes up. Private airlines have charged as high as Rs 25,000 for a one-way ticket between Mumbai and New Delhi, taking advantage of cancelled flights that day. Now look at the prices of eggs. If supply-demand is the mantra, then how come prices of eggs are almost uniform throughout the country? How come the demand for eggs remains the same in New Delhi and Bathinda, for instance? It is because a handful of people/companies decide the egg price for the day.

I can go on with such illustrations. Often the blame is rested on the Agriculture Produce Market Committee (APMC) Act, which regulates the agricultural markets. But there is no APMC Act for the airline industry. And look how conveniently they have unbundled the prices to even charge for a seat preference.

In agriculture, organised retail players such as Reliance Fresh, Easy Day, Big Bazaar, Spencer’s and others who buy the produce directly from farmers, too, have failed to pass on the price benefit to consumers. Replacing one set of middlemen with another, therefore, is not the answer.

Source: Tehelka Issue 35, Vol 10. Aug 31, 2013

No comments: