The Abrupt Increase in Prices of Onions Finance Essay

Introduction

Onion is the common name given to plants in the genus Allium. It is very widely used around the world for different purposes by almost all people. Even in India it is used by people from almost all parts of the country for making different kinds of food. In a country as diverse as India, finding something common is not an easy task. But, this vegetable is an important part of the recipes of food from all cultures. So, when the retail price of a kg of onions went up from Rs. 35 to Rs. 80 in the third week of December 2010, it stirred up people from around the country. The poor weren't able to afford onions, the middle class too found it difficult and traders were running out of business. The political class too was filled with activity. Elections have been lost in the past due to the price of onions. Hence, the government didn't take the issue lightly and tried their best to solve the issue with the least amount of damage. In this report the causes, impact and the steps taken will be discussed.

Causes

The following are few of the main causes for the sudden abrupt increase in prices of onions - Failure of crops due to unseasonal rains Export of onions in large quantities Hoarding

Failure of crops due to unseasonal rains

With a very successful monsoon the farmers were expecting good results from kharif. It was also believed that a record harvest season was on its way. But a spread of fungi due to untimely rains meant that only 10% of the produce was available for retail.

Export of onions in large quantities

With failure of the crops, the country was largely dependent on the stored onions from the previous rabi. But, because of lack of regulations required for the time, a lot of the onions, which was stored, were being exported to other countries. This created further shortage and caused to price to go up even more.

Hoarding

Hoarding is a general term for the accumulation of food or other items. With the failure of crops, dealers across the country resorted to hoarding as a means of increasing the prices of onions. With the rate at which the prices were increasing, hoarding was the last thing the people and the government wanted. The dealers made a fortune at the expense of the farmers and the people.

Impact

Onions are an important part of the Indian kitchen. It's very tough to run the kitchen without onions. Hence, the hiking of its prices has an impact of a very large magnitude. The people most hit by the hike were the poor. Most of them chose not to buy the vegetable and instead live without the nutrition. India has one of the highest populations of mal-nourished people. This added to the toll. Mr. Bala, a laborer from Bangalore had this to say "The prices of basic necessities are going up very fast. Until last year, we could live with the pay I get as a laborer, but now that is not happening, with the rates of onion, sugar and milk going up, I am not able to provide my children with what is needed" The middle class too haven't had it easy. Even though most of them didn't sacrifice on vegetables they have had to decrease quantity and keep things tight. Mrs. Krishna, a homemaker, says "The way prices have been increasing is ridiculous. It is becoming harder to survive with the magnitude of the hike. Our budget is being stretched to the maximum possible limit." Ahmed Noor, owner of a departmental store gives us the actual ground situation "Since the hike was sudden, people were careful for a few days and expected the price to go down.

But as soon as their stocks started drying up, they started buying in small quantities for their daily requirements. This further increased the price as there is a lack of supply. We haven't been getting the required amount of onions for over a month and our unavailability of onions has lead to speculations of hoarding, which I can guarantee is not the case, and this is a genuine problem of supply" Restaurants too were cautious regarding onions. While a few restaurants have decided to increase prices, others have decided to hold on with the prices for a while, meanwhile being cautious about usage of onions. "We don't like to increase our prices. But we have been left with no other choice regarding the issue. The prices of vegetables, milk and meat have been going up, and this sudden hike in the prices of onions gave us the reason to increase our prices. Although we didn't increase our prices by much, we have decreased the usage of onions and have stopped serving salads with onions as complementary" says a restaurant owner. With the supply crunch, and the price, the farmers are expected to be a happy lot. But that's not the case. Most of them have suffered a big loss.

The money invested has been lost as most of their crops have been damaged and the prices of onions stored from the previous rabi, not comparable to that of the market prices. The farmers around the country accuse middle men of making the most out of the current crises and urge the government to take suitable steps to make sure that the middle men don't attain unfair advantage. Politically too, the hike has caused a lot of action, with opposition parties blaming the ruling parties and parties within the ruling coalition blaming each other for the inability in controlling prices. The hike also played a small part in worsening the already tense Indo-Pak relations. The issue was about not stopping truck loads of onions, meant for the Indian markets, at the wagah border. Local traders attributed the imposition of ban on export of onion by Pakistan government to prevent any spiraling hike in bulb prices in the neighboring country. Sudden ban imposed on export of onion has hit the traders of both the countries with Indian importers claiming that Pakistan had not even allowed the supply of almost 1,500 tonnes of contracted orders of onion.

Steps taken to control prices

The price of onions is considered to be a political issue. It's an issue which has brought down governments in the past, and brought great pressure to the current government. The following steps were taken immediately by the government on the backdrop of the hike to bring down prices. Complete ban on export of onions Minimum export price increased from $525/tonne to $1200/tonne Import duty on onions reduced to zero With these measures and fresh stocks of onions arriving, the rates of onions came down for the time being. But the rates of basic commodities as a whole was still at peak and remain a worry for the currently ruling government. In view of this, the PMO released the following statement on 13th January 2011 with steps against price rise-

1. The Government has been closely monitoring the inflation situation with a view to protecting the common citizen against abnormal price rise. Our experience in the recent past has been that while prices of most manufactured goods and services have been reasonably stable, food prices have frequently risen at unacceptable rates. 2. A year ago, the primary concern was with foodgrain prices which were pushed up because of the drought of 2009-10. We were able to bring foodgrain prices under control thanks to additional release through the PDS and a strong effort to increase production. The current bout of inflation is driven by a rise in prices of vegetables and fruits which is more difficult to manage because these commodities are not held in public stocks. The rise in prices is partly due to late rains, which affected the onion crop. There is also an underlying increase in prices of milk, eggs, meat and fish, which is the result of fast growth of the economy, leading to rising income levels, combined with the effect of several inclusiveness programme which put greater income in the hands of the relatively poor whose food consumption increases. 3. The only lasting solution to food price inflation lies in increasing agricultural productivity.

Government has taken up important new schemes, and provided large budgetary support to these, with a view to boosting agricultural production not merely in cereals but also in pulses, oilseeds, vegetables and fruits, milk and milk products, and poultry etc. As incomes rise, demand shifts towards horticultural crops, dairy products. These are perishable and need sustained development of market facilities, cold storage etc, quite different from what is needed for foodgrain. 4. The Government has recently reviewed the position and is taking the following measures to moderate these price increases: (i) NAFED and NCCF shall undertake sale of onions at Rs 35/kg from their retail outlets in various locations, with suitable budgetary support to be provided for this purpose. The arrival of onions from Pakistan will also help cool prices. Import of 1000 tonnes of onion has already been contracted. Export of onions stands banned. (ii) Government will review import and export of all essential commodities on a regular basis and impose controls on exports and ease restrictions on imports, including tariff reduction where necessary, to improve domestic supplies. (iii) Public Sector Undertakings shall intensify purchases of essential commodities, particularly edible oils and pulses, for distribution through their retail network and also through the Public Distribution System operated by the State Governments.

The existing schemes for subsidized distribution of edible oils and pulses will be continued. Exports of edible oils and pulses, as well as non-basmati rice, will remain banned. (iv) Government will take stringent action against hoarders and black marketers manipulating market prices, under the relevant legal provisions, so as to ensure that products reach the markets in a timely manner to moderate the prices. Cartelisation by large traders will be strictly dealt with. The States will be requested to ensure that such action is effectively taken under the Essential Commodities Act, 1955, and the Competition Act, 2002. (v) Awareness campaigns will be intensified bringing out the availability of alternatives at cheaper rates such as yellow peas with a view to influence consumption pattern in favour of such alternatives. Special initiatives will be taken to involve Residents' Welfare Associations and Self-Help Groups in distribution of essential commodities to address local shortages and ensure that the supplies reach the households with least intermediation cost. 5. Other measures involving a somewhat larger horizon include the following: (i) A scheme to support the state governments in the setting up of farmers' mandis and mobile bazaars and to improve the functioning of civil supplies corporations and cooperatives will be finalised urgently. (ii) The existing Public Distribution System will be suitably strengthened through computerization and other steps, including opening more procurement windows across the country.

State Governments would be urged to review the Agricultural Produce Market Committee (APMC) Acts and, in particular, consider exempting horticultural products from its purview thereby mitigating marketing and distribution bottlenecks in this crucial sector. State Governments will also be urged to consider waiving mandi tax, octroi and other local levies which impede smooth movement of essential commodities, as well as to reduce commission agent charges. (iv) Investment will be encouraged in supply chains, including provisions for cold storages, which will be dovetailed with organized retail chains for quicker and more efficient distribution of farm products and minimizing wastage. Department of Industrial Policy & Promotion, Department of Food & Public Distribution and Ministry of Food Processing Industries and the Planning Commission will jointly work out schemes for this purpose. 

Suitable support will be extended to facilitate stocking of the bumper Kharif 2010 crop, including by augmenting storage capacities and modernizing/ upgrading the godowns and other infrastructure. 6. An Inter-Ministerial Group (IMG) has been set up under the Chief Economic Adviser, Ministry of Finance to review the overall inflation situation, with particular reference to primary food articles. The IMG will, inter alia, review production/ rainfall trends and build an institutional machinery to read warning signals, assess international trends, recommend action on fiscal, monetary, production, marketing, distribution and infrastructure fronts to prevent price spikes, and suggest measures to strengthen collection and analysis of data and forecasting. 7. The Committee of Secretaries under the Cabinet Secretary will review the prices situation with individual States, and advise the Departments concerned of the Central Government to maintain close coordination with State agencies to get direct feedback with a view to taking suitable remedial measures on a fast-track. 8. The Government is watching the situation closely and is committed to containing the adverse impact of any inflationary pressures on the common man.

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