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How Govt can tackle onion crisis

Pravin Chandrasekaran
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It can create a central data server to monitor every small market

Onion prices have become an important issue since 1998 when India tested its nuclear weapons. Prices of onion have become a subject of regular conversation in every household in India.

This article will discuss onion prices, given the onset of monsoon season and the Government’s worry to tackle food inflation. It might be prudent to introduce a few ideas to help the onion market from a policy standpoint.

According to data published by the Ministry of Agriculture, over 16 million tonnes of onion are produced annually with a yield of around 15 tonnes/hectare. India is one of the largest producers of onion in the world, along with the US and China.

Conversely, per hectare yield of onions in India is among the lowest in the world. Global average yield is around 19 tonnes, and yields in countries such as Korea and the are over 50 tonnes/hectare. There are a few points that I would like to highlight for consideration.

First, I do not see the demand for onions going down in the long run. Thus, the long run trend for demand will be upward. In addition, the long run demand of onion will be inelastic relative to any short run price change.

Second, yield adjustments in India are sticky, which means that it is quite unlikely to improve in the short term to bring about any structural change in the supply curve. Third, there is little hope from an inventory stand point where one could argue that a large rabi (winter) crop could be stored to offset the kharif (summer) production fluctuations due to the vagaries of the monsoon.

While the points above sound pessimistic, the solution is more realistic, and I am quite optimistic that a proper interventionist policy by the Government can result in ameliorating the ongoing onion challenges in India.

So, what needs to be done? The government needs to act real-time and intervene pro-actively. One such intervention would be to create a central data server where onion prices from every micro market in India are reported. This isn’t as difficult as one might guess, but I would leave it to entrepreneurial minds to find a solution.

This information gathering exercise is important so that we can see why certain markets are priced at a premium over others.

If there are any arbitrage opportunities between micro markets, they can then be taken advantage of by traders resulting in a price benefit to consumers. Once all this information is digested in real time, the government would know exactly in which markets it needs to intervene.

Another intervention the government can enact is bringing the producers and consumers closer by creating an artificial strangle. I am using the options parlance here, and what I mean is that the government writes a call to the consumer and writes a put to the producer.

This means that the government is short on the price volatility, which it can hedge with a global reinsurer. This methodology will help producers and consumers in the case of a monsoon failure.

Financial institutions are quite capable of delivering this solution to the Government.

Using data to create a real time solution design is paramount in this age; and it should be doable. It is imperative that policies are designed to act lest today’s troubles become yet another case study in the annals of onion tears.

The writer is based in London and is the founder and Managing Director of OpalCrest (www.opalcrest.com).

(This article was published on June 17, 2014)
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