Speculators at work

The sharply rising onion prices have raised the suspicion that speculators are manipulating a shortage situation.

First, a few facts. In retail markets, onion prices have soared from Rs 10-11 per kg in June to as high as Rs 70-80 on Dec 21. Even more significantly, prices zoomed by 50-100 per cent in some markets in the course of 3-4 days before stabilising at around Rs 50 per kg after the government announced some measures to bring down prices.

The steps include raising the minimum export price by more than 100 per cent followed by a total ban on export of onions ‘until further notice,’ allowing duty-free imports of onions (against the earlier 5 per cent import duty plus 4 per cent countervailing duty), government agencies selling onions at half the market price at the retail outlets in Delhi and raiding some godowns to discourage  ‘hoarding and speculation.’

According to government spokespersons, the unseasonal heavy rains have damaged onion crops by some 40 per cent of normal production in Maharashtra and by 15-20 per cent in Karnataka, Gujarat, Rajasthan and Madhya Pradesh.

Even if the immediate reason behind rising prices is weather-related production shortfall, how does one explain the near doubling of the price within a few days? Is hoarding by big traders a major culprit?

Theoretically, under certain conditions, speculators collectively can be substantially better off by hoarding. Suppose, total production is 100 and the current price is Rs 5. So, total sales revenue is Rs 100x5 = Rs 500. The big traders/middlemen hoard 20 per cent and hence sell 80. If the demand for onions is not sensitive to price rise (in economists’ terminology, the price elasticity of demand is sufficiently less than 1), price goes up to, say, Rs 7. Sales revenue with hoarding is then Rs 80x7 = Rs 560 which is more than without hoarding. The hoarders will end up being better off even if the price drops to zero when they dishoard in future. Thus, traders can be net gainers by hoarding.

Of course, for such a thing to happen, the traders must be large enough to exercise control over the market price and demand should be relatively insensitive to price rise. A small trader, by withholding supplies from the market, will not be able to raise the price but will only sell less quantities, earning less revenue. He clearly becomes worse off.

A theoretical possibility does not prove, however, that such a thing has actually happened in the case of onions. But, given that the actual farmers have not shared in the exorbitant price hike (as media reports indicate) it strengthens the suspicion that big traders/middlemen have manipulated price by hoarding and have made a quick buck before the government took any counteraction. Further, the fact that wholesale prices immediately dropped by some 20 per cent after the government announced countermeasures lends further credence to the hoarding hypothesis.

Better framing practices

Regarding remedies, the long-term solution to the persistently higher rate of food price inflation (including that of onions) has to come by raising productivity of land in agriculture through more investment in irrigation, higher yielding seeds, fertilisers, pesticides, GM-crops (where possible and safe) and better framing practices.

Given the fixed (even shrinking due to industrialisation and urbanisation) quantity of agricultural land and steadily rising urban and rural incomes in India growing at 8 per cent plus per annum, farmers would switch between crops in response to changing relative prices.

A high price of onions at one point may induce more production in the next season which may bring down the price of onions but by only raising the price of some other alternative crop whose production will fall. This kind of switching (economists call this ‘cobweb cycle’) would not have any significant impact on the overall food prices, unless productivity  improves which would benefit both producers and consumers.

More cold storage facility is urgently needed so that wastage of crops is minimised and more supplies reach the market.  Moreover, supplies to the market would be more evenly spread leading to greater stability of prices over the year.

Exporting and importing is another mechanism to be used more readily to stabilise the prices. One criticism of the government could be that the government either does not have an effective early warning system or that it is very slow in reacting until a full-blown crisis develops.

According to media reports, despite warnings of a crop shortfall in early October, Nafed — the government importing agency — placed an import order for a mere 650 tonnes of onion from Pakistan and 2,000 tonnes from China. Now, commerce minister Anand Sharma is talking of a loss of one million tonnes of onion in Maharashtra alone.
Well-publicised shortage and big buying in a crisis situation immediately raises the global price which can be avoided by less publicised purchases from a number of sources spread over a period of time. In the present case, the onion price has already gone up by 20-30 per cent in Pakistan after the panic buying by India.

Onion from Pakistan (about 500 tonnes each day) is coming into India at a rate of around Rs 45 a kg. In that case, imports are not going to bring down the onion price below Rs 50. The real respite to consumers will have to wait till the new crops arrive in February.

(The writer is a former professor of economics at IIM-Calcutta)