Managing onion shortage without tears

The Indian Government is aware that its intervention in correcting prices of perishable commodities such as onion will not be effective. The Prime Minister and the Agriculture Minister have said so.

The supply-demand gap in onions has arisen because of poor production in last year’s kharif (weak monsoon in 2012) and rabi (poor moisture) crops in Maharashtra, Rajasthan, Gujarat, Andhra Pradesh and other states.

The prices of onions has rocketed to Rs 55-60/kg as against the previous year’s quotes of Rs 15-20/kg — up about 300 per cent. Such mismatches did erupt earlier (last one in November-December 2010) and settled within the short span of three months (March 2011). The current price trajectory has electoral implications for the ruling party. The “onion issue” is unfairly targeted as another example of economic mess. The theory of traders hoarding a perishable crop such as onion when the next crop within a month will induce downside price pressure, is not logical.

Correction of this disequilibrium is a function of the market. The government cannot produce or arrange additional supplies through quick-fixes.

Expectations from consumers and the society for subvention/price reduction have soared due to emphasis of UPA regime on the Food Security Bill (FSB), which allows two-thirds of the population access to grain at 90 per cent of the costs. Official agencies, nevertheless, are making news and noise that “something is being done”.

Since the quantum of subsidy to be appropriated has neither been assessed nor discussed or is in the public domain, no serious attempt may be under contemplation.

The costs of vegetables, milk, and so on have also spiked. The severity of continuing rupee deprecation is asserting “import inflation” in pulses and edible oils.

The aam aadmi is showing initial symptoms of addiction to state subsidies. Certainly, the Government cannot become a vendor of grocery and replace the market. Neither should it attempt to do so.

PSUs cannot help

Can PSUs buy onions “locally” at Rs 70-80/kg in bulk and then subsidise them for disposal at, say, Rs 20/kg in mandis or fair price shops? Not at all. If this happens, these PSUs might reinforce a recycling system similar to the wrecked PDS (public distribution system) of grains.

Recently NAFED and PEC have publicised their intent to import on Government account. Pakistan is the most probable origin from where the bulb can be sourced. This publicity has three implications — first, depressing domestic prices on short-term basis, which are sure to rebound as physical imports may not be feasible in the short window of 45 days.

Second, import prices, especially in Pakistan, will skyrocket and private imports already contracted may default. Third, their arrival may coincide with availability of new crop of the tuber in October 2013. Both farmers and official importing agencies will be the losers.

However, none of the trading PSUs are proficient enough to meet emergencies for any perishable commodities — be it tomatoes, potatoes or onions. There is no list of well-known reliable parties available who can be trusted for performance.

Even MNCs are not traders of the tuber. The process of due diligence for identifying a performing party will be a very intricate exercise of trial and error. No refrigerated containers from China/ Malaysia to India are being sourced.

Under what circumstances these consignments will be stored, if required, is another challenge. Surely, they cannot be stocked like FCI does, in CAPs storages for wheat. If imported tuber gets damaged or becomes inedible for consumption, PSUs will be answering queries of vigilance and audit.

Pak deals risky

The tendering procedure imposed on PSUs severely restricts swift response in crucial periods of high price volatility.

The transaction, in any case, will be loss-making and bureaucracy will keep itself aloof and insulated. PSUs may, therefore, not be willing to shorten the procedure. They will need prior written consent for reimbursement of losses, which may not be forthcoming. In the past, PSUs which had imported pulses and edible oil during 2007-10 on behalf of the Government have not been fully reimbursed.

CAG reports on import of pulses and edible oil have faulted PSUs/ministries for lack of market knowledge and poor compliance with procurement and disposal procedures. This discourages any proactive stance by policymakers. High rupee volatility against the dollar is another uncharted dimension.

In dealing with Pakistan, there is inherent risk of prices shooting up in that country, compelling the Pakistani Government to impose ban on exports both by land and sea routes. No claim on the seller can be recovered under such force majeure conditions.

The efforts and exercise made to call for expression of interest/tenders will remain a formality. However, there are lessons to be learnt to mitigate the impact of volatility in future.

They are — enable the private sector to build warehousing for stocking perishable items, supplemented by latest food processing facilities and modern retailing; diversifying vegetable/onion production in other States, by shifting emphasis on wheat/rice combo; maintaining free trade policies to incentivise higher output; better price realisation for farmers by market expansion; discourage addiction to subsidisation and let the market forces prevail.

(The author is a grains trade analyst)

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