Commodities

Govt strategies on onion unworkable

Tejinder Narang | Updated on November 25, 2017 Published on July 24, 2014

BL17_NEW-ONION

Imports will lead to price rise globally; export curbs can result in shady deals



The inter-ministerial suggestions for import of over one lakh tonnes of onions and the decision to hike minimum export price (MEP) to $500 a tonne f.o.b to curb shipments are not the panacea for cooling the surging vegetable’s price. It is easy to say “we can import” but the nitty-gritty of process of import may not be workable beyond a few thousand tonnes.

Since the Government may subsidise imports, private trade will stay aloof from taking any initiative. Thus PSUs may be fronted with mandate to subsidise by 50 per cent, or in simple terms, will be asked to sell at a huge loss.

Imports

According to Government guidelines, PSUs must undertake due diligence before initiating any commercial operation. No PSU has a registered/pre- qualified list of performing parties who can efficiently deliver onions within short span of 45-60 days. Though the country of origin too remains unidentified, one can surmise that origin could be predominantly Pakistan. China could be another source but logistics will be difficult to handle.

Dealing directly with little known and never tried Pakistani or Chinese sellers may not be commercially viable. The option then devolves upon Dubai or Singapore or UK-/EU-based traders who become intermediaries in import transactions at extra cost. Government tenders require 21 day notice period for submission of bids. Business can be finalised with the lowest bidder. Finalising with next low bidders may require special dispensation from vigilance. Imports from China can take place only in “reefer containers” or refrigerated containers — which do not ply on India-China route. Their availability too is scarce. These are procedural issues.

Then there are some other concerns on bidding, pricing and implementation. Assuming a tender for import of 25,000 tonnes is notified, bids received may not be for more than 500-1,000 tonnes from each bidder. The reason is simple: Indian demand will spike prices of onion in Pakistan or China. Foreign sellers will like to limit their risk exposure. Against a single tender, contracting of not more 2,000-3,000 tonnes may be feasible and that too if procurement guidelines are relaxed.

A simple search on the Internet reveals prices of Pakistani onions vary between $400 and $700 f.o.b, depending upon quality. Should c.i.f cost of imported onion be say $500/tonnes at Indian ports or ₹30,000/tonne, then cost at mandi may be minimum ₹36,000 or ₹36/kg after accounting for 20 per cent as storage, financing, internal movement, shortages, rotting, etc. At 50 per cent subsidy, the wholesale price will be ₹18/kg which involves subsidy of ₹180 crore for one lakh tonnes. Has this subsidy been approved? Only then, the retail price can be ₹20-22 a kg.

If frequent bidding is called for, local prices in Pakistan will be hyper inflationary, escalating to say about ₹50-60 a kg or $1,000/tonne or more. These developments will compel Pakistan to ban its exports. All concluded contracts will be frozen under force majeure. Neither any arrival of onion nor any claim can be realised.

MEP and Ban

Minimum export price facilitates shady deals. Parties to the deal may be situated in India and UAE who may be sister companies or such associates companies who conduct trade with prior understanding. Excess payment can be transferred through grey or illicit channels to the buyers for ensuring remittance to Indian exporter or black/unaccounted funds stashed abroad can be formalised through banking channels. It is inconceivable as to why Governments knowingly or unknowingly become complicit in such questionable transactions.

Putting blanket prohibition on Indian onion export may be helpful for downward pressure on onion prices. But it will inflate prices of other origins like Pakistan. If import is an option then banning export will be counterproductive.

Since Governments are seldom logical and rational, but more political—they continue to ignore market dynamics and pursue interventionist policies of hitting at the middlemen, subsidization – buying at high prices and selling below market prices – banning exports etc without any result. Onion problem is seasonal. Soaring prices have to be tackled by the market. Policymakers can never capture millions of options under which a market operates.

Sharad Pawar rightly commented in October 2013 – “Government does not control onions and does not sell onions. Prices are determined by the market.” His thought process can be a gentle reminder.

The writer is a trade analyst

Published on July 24, 2014

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