The middleman problem: Why onions will bring tears to Modi’s eyes

Narendra Modi’s top priority during the election rallies was not creating jobs or manufacturing, it was to bring down inflation. With the wholesale price inflation accelerating to a five-month high in May, onion prices, one of the biggest concerns of the previous government, is starting to climb yet again.

[caption id=“attachment_1578553” align=“alignleft” width=“380”] Onion prices continue to go up as WPI was at a five-month high in May. Reuters[/caption]

Onions are currently retailing for Rs 20-30 per kg in different parts of the country. But,  according to some traders, onion prices are poised to jump to Rs 100 per kg.

Only a few months back, the now Prime Minister Narendra Modi  pointed out that onion prices had increased by 1,500% since the time when the National Democratic Alliance was in power. He took digs at the UPA government saying,“When Congress leaders went to plead with onions, onions said that like you peeled off the nation, we have decided to peel you off.” In one of his rallies, he had also said that there were bets on whether Sachin will score a century or the price of onions.

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But, it seems, Modi’s claims may be a source of embarassment for him in the coming days.

According to an Economic Times report, onion prices are set to rise as hailstorms and unseasonal rain in the past, along with the weak start of the monsoon season has created scarcity and strong inflationary pressures.

What really is the onion problem

Prices of onions have been a major political issue in India. The country consumes about 15 million tonnes of onions a year, using them as the base for curries and traditional dishes such as biryani and bhaji. In fact, in the past, higher onion prices have even contributed to the fall of state governments.

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The problem of high onion prices seems to have existed forever, and you can blame the middleman, or rather the presence of too many middlemen, for the price hike.

Essentially, by the time a consumer buys onions,  it changes hands about four times, adding over a quarter to the cost at each stop. It’s a long chain–farmers, traders, whole-sellers, mid-sized vendor and then your kirana store. At every stage, there’s a wastage and there’s added cost.

 Why the government’s measures won’t help

The new government imposed a minimum export price for onions of $300 per tonne to discourage overseas shipments. However, the ET report notes that onions are particularly vulnerable despite the imposition of a minimum export price (MEP) as the adverse weather in Madhya Pradesh and Maharashtra may lead to a fall in output.

Earlier, Finance Minister Arun Jaitley said that farmers will be able to sell fruits and vegetables anywhere they wish rather than only in state-controlled markets. However,   AV Manjunatha, agricultural economist at the Bangalore-based Institute for Social and Economic Change told Bloomberg that these are only ’temporary measures’ and will not have any long-term impact on prices.

A CII report on ‘Competitive Assessment of Onion markets in India’  notes that selling of onions are in fact dictated by traders and not farmers. So, why can’t a farmer directly sell his produce? For the simple reason, he is not capable of taking that risk.

The CII study notes that due to unfavourable weather conditions and price risk, most farmers are forced to play a small role in the price decision.  Add to that lack of trading expertise, market knowledge and risk bearing capacity has prevented most farmers to make any dent in onion trading.

Also, due to onions being a perishable good–the active period for selling produce is usually a fortnight.  Most farmers’ associations have been unsuccessful in their operations because a short period of business cannot sustain their year-long expenses.

Then, there are unions which have been pushing governments for wage hikes. A report in The Hindu notes that manual labourers, who are covered under the Mathadi Hamal and Other Manual Workers (Regulation of Employment and Welfare) Act, 1969, had been on strike demanding a hike in wages for loading onions. It was called off on Tuesday evening with the state government assuring them of a hike in wages.

However, onion traders, say hoarding is impossible, particularly in this summer. A trader Bloomberg spoke to says, “How can we hire warehouses to hoard when we are hand-to-mouth?”

This story first appeared in Firstbiz