Onion prices beat textbook economics

Onion prices beat textbook economics

Onion prices created an economic emergency-like situation. This does not happen with any other commodity as intensely as it happens with onion, tomato and petrol. For economists, demystifying the most confusing behaviour of onion prices is a challenge. Professor CT Kurien, in his book “Economics of Real Life” challenges the textbook preaching of the subject. Onion price in the Indian market is one such example that defies the textbook laws of ‘Commodity Economics.’ Most researchers analysing the commodity economics of onions use the typical neo-classical framework of supply failures, market imperfections, hoarding and excess exports as explanations, but they could not reach the political-economic nexus. It is necessary for economic analysts to peep out of the textbook’s iron windows to look at the price behaviour of onions.

Usually, when there is a spike in onion price, the immediate reasons presented are of three types. First, it is blamed on the climatic conditions in the onion-growing areas for a sudden shortage in the wholesale market. Second, the arrivals in the market have been marred due to various factors (transport strikes) and so the prices shoot up due to supply bottlenecks. Third, the demand for onion consumption has risen in the recent past.

The first economics-based explanation collapses as there is no perfect correlation between supply troughs and price spikes. It is true that heavy rainfall in the onion-growing regions this year spoiled the crop and reduced the arrivals in the market. Imports were not resorted to immediately under the pressure of the onion traders’ lobby. Since the onion markets from Tamil Nadu to Azadnagar in Delhi are perfectly integrated with the current communication systems, the reaction to this shortage/repercussion of the price behaviour in major markets like Lasalgaon (Maharashtra) are immediately amplified in other markets. 

Despite the significant arrivals in the markets during September to December, onion prices remained relatively higher in Bengaluru and Hubballi markets. Notably, during September to November, the arrivals in Hubballi market were significantly high and very low in Bengaluru market, but the prices of onions shot up in both markets to match each other.

Onion markets

Market functionaries and functions are the real villains. The market margins from the onion-growing farmer to the consumer is about 10 to 20 times. While a farmer gets Rs 18-28/kg, the consumer pays Rs 120 to Rs 180. Our recent enquiries in the interior of Nashik district revealed that the onion farmers who had lost most of the crop had saved a little and sold a few quintals at Rs 2,800/qtl, while in Lasalgaon market, onion was being sold at Rs 15,000 per quintal.

Largely, it is the small and marginal farmers who grow onions and hence their volume of marketable surplus is small. This group is vulnerable to weather, price fluctuations and weak bargaining strength as they have no storage capacity. With their weak bargaining power and immediate cash requirements, these growers sell their produce at the price quoted by the “usual” traders. The traders buy small lots from farm sites in the villages and APMC and get the produce to godowns for grading and dispatching. The traders in different places know each other intimately and talk about the trends informally.

We could see that there are well-set cartels across the markets and, thanks to instant communications, the rates in all markets converge. Market barriers function effectively in an informal manner, which is communicated only by signals among well-knit groups. Similarly, the price fixation is also communicated through body signals than actual numbers. The entry barrier to new traders or operators makes the market imperfect and the prices in markets across the country are steered by this small cartel.

The economic theory of market behaviour and the entire learning from Joan Robinson collapses here under the pressure of these skillful operators. Undoubtedly, the speculators and hoarders play a crucial role in managing price fluctuations. Hoarding onions for two to three weeks earns them 4-5 times the price. A few rupees more a kilo makes a difference to the main operators in Nashik, Pune, Hubballi, Ahmedabad, Bengaluru and Delhi because the business runs into thousands of crores.

Political Network

Onion trade in India is largely in the hands of a few operators and they are connected with politicians as fund suppliers. The major traders of onion are always connected in groups and dictate the prices. Their vocabulary is totally different and not easily decipherable by the common man. The traders also provide credit to each other to buy and sell the commodity. This is a well-oiled political economic network that operates in the onion trade in the country. This cartel controls the prices as well as the movement of onions. It is here that the principles of economics collapse due to cartelisation and one fails to explain the price volatility of onion through standard economic principles. Even the standard theorems of neo-institutional economics or asymmetric information theory fail to break this economic puzzle.

(Deshpande is Visiting Professor, Shaha is Researcher at the Institute for Social and Economic Change, Bengaluru)

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