The importance of knowing one's onions

If onion is indeed the kingmaker in India, the past few months have been terrible for the government.

The onion is key to the economy of India and politicians ignore the humble vegatable at their peril. Reuters / Rupak De Chowdhuri

Woe to the Indian politician who underestimates the power of the onion. The humble vegetable is a staple in Indian cuisine, but it has been disappearing from Indian kitchens as its price has risen astronomically by local standards.

Such a steep rise can have devastating political consequences. Back in 1980, when Indira Gandhi led the Congress party back to power after India's first-ever non-Congress government fell apart, she chose the pungent rise in the price of onions as the symbol of the government's ineptitude.

She promised stability and lower onion prices. The onion problem was not the sole reason she won, but it was an important reason for her return to power. Nearly two decades later, the state government of Delhi fell because of its apparent failure to keep the price of onions low.

If the onion is indeed the kingmaker in India, the past few months have been terrible for the government - the leaders must consider themselves fortunate that nationwide elections are still four years away. Food inflation was 12 per cent in the past quarter, and onion prices rose 4.56 per cent on a week-by-week basis. On an annualised rate, the price rose 33 per cent.

Not just onions have escalated in price: pulses, tomatoes, milk and meat have also become costlier. But onions matter.

The government has acted promptly: Manmohan Singh, the prime minister, has written to senior officials to ensure that the price remains stable, and senior bureaucrats have formed a task force. The government has banned exports of onions, slashed import duties and even imported onions from Pakistan.

Cost-sensitive restaurants have begun replacing onions with radish. Rahul Gandhi, the general secretary of the Congress party, has told voters to leave the matter in the good hands of the prime minister, giving the mild-mannered economist-turned-politician Dr Singh unusual powers over a phenomenon that has less to do with the laws of supply and demand and more to do with structural inefficiencies and poor investment in Indian agriculture.

As you peel the layers of this onion, it is clear that the immediate reason behind the rise in prices is the unseasonal rain in western India, which has affected the crop - a drop in yield, by some estimates, of 16 per cent. India has many poor farmers and many poor consumers.

Poor farmers do not always have crop insurance, or they have debts to settle, so they do not benefit from the windfall price increase. And poor consumers do not have the extra cash to pay more for onions.

The deeper reason has to do with how India tries to meet the twin, mutually contradictory objectives of increasing farm income and reducing consumption costs. Farmers can get richer if they get more for what they produce - and that the consumers should pay.

But both constituencies - farmers and consumers - want more without bearing the risk or cost it entails. And the state promises to meet the gap but makes the situation worse through mismanaged subsidies in agriculture and making poor investment in infrastructure.

India's supply lines are clogged because of inefficient storage, poorly maintained roads and bureaucratised, centralised interstate commerce. Indian inflation - of about 9 to 12 per cent - is tiny, compared with genuinely hyperinflationary economies - but price-sensitivity is high, because a large number of people are poor.

As incomes rise in urban India and elsewhere, consumers are eating more, including more onions. If supply does not keep up with demand, prices should rise. But it has not been good for farmers.

And just as the government cannot afford to ignore the rural distress, it cannot have angry urban voters either.

And so the government tries to keep farmers and consumers happy by subsidising consumers through fair-price shops and other market interventions, and providing freebies to farmers.

But the state regulates trade and sets prices, and farmers often do not like those prices. And so they refuse to sell their produce, trading through parallel markets where they get better prices.

The government intervenes - by banning farmers from exporting products - then throws taxpayer money at farmers through subsidies. And it makes sure urban consumers do not revolt by issuing orders against hoarding, and by conducting raids against traders. Much of this is good theatre; none of that offers a sustainable long-term solution.

In fact, it is outrageous; according to estimates, a staggering 30 to 40 per cent of Indian farm produce rots in poorly kept state-run warehouses, or its condition worsens during transport on India's badly kept state-maintained roads.

Farmers cannot trade easily within India across states, which means traders are unable to move onions quickly from a region where the production is abundant to a region where demand is high and supply low.

The result? Inefficiency, ineptitude, incompetence, and insufficiency, which become incendiary at the electoral hustings. And that's the bizarre part - that something outwardly insignificant, like the price of onions (which forms only 0.18 per cent of India's wholesale price index), can destabilise the government.

In reality, the politicians are right to be alarmed about this, because despite India's industrial growth and software boom, at heart, the country has many poor people, with too many people calling themselves farmers, but who are often landless labourers working on other people's farms.

Many have unsupportable debt levels and do not have the means to invest in technology, consolidate farms or improve productivity, all of which could boost their incomes.

They find no way out to better-paying jobs in the villages, because of the absence of basic infrastructure in the rural areas, which would be necessary for entrepreneurs to establish factories that could use that surplus labour in the countryside.

Political opposition to big business means large companies that want to set up groceries and supermarkets in urban areas, and which could establish warehouses in rural areas and consolidate food production by transporting it to urban centres using good roads, have little incentive to do so.

The country remains agrarian and is even proud of it, even though agriculture's share in GDP - or contribution to growth - is shrinking. About 50 per cent of Indians rely on a sector whose share of the economy is shrinking, and which grows only 2 per cent a year.

That growth rate can be improved - but to do that, the government needs to do less: it should liberalise interstate trade, improve roads, attract investment in cold-storage warehouses, permit more efficient ways to produce, preserve and transport farm produce, and allow greater flexibility for investment in the agriculture sector.

That may mean new types of jobs, newer sectors, and a different demographic profile. But it will be a more prosperous one - with a dash of onions everyone can afford.

Salil Tripathi is a writer based in London. He is a former economics correspondent of the Far Eastern Economic Review