Tears Don't Discriminate
If one were to examine the history of Indian politics and make a list of all the issues that have plagued every one of our governments for the past thirty years, one would arrive on a few conclusions. First, that the list is tragically long. Second, it has the usual suspects of religious, caste and gender issues. Third, and most importantly, that for a nation of 1.2 billion people, Indians are surprisingly bad at handling food distribution. And at the core of this problem there lies an example which perfectly encapsulates the Indian dilemma. The issue of Onions.
The Onion is a staple of the Indian diet. And yet, every government since the time of PV Narsimha Rao has struggled with the question of how to make them reach our plates. The fact that this is an entirely solvable problem is announced rather embarrassingly to the entire world by the quantity of Onions that India exports, which is the highest in the world. It is rather clear that this is, in no way whatsoever, a production issue. It is an issue of distribution, and it is an issue of storage. Consequently, it is an issue of an entity which has, via its own dictum, made itself the sole proprietor of the storage and distribution of Onions. This flailing entity is, off course, the Indian Government.
But to understand how the government regularly causes such catastrophic supply irregularities in the Onion market, one requires a little background, which we will now delve into.
In India, Onion production (due to our agricultural sector’s embarrassing dependence on the monsoon) follows a seasonal cycle of boom and busts. Once a year, the supple plummets, while the demand remains constant. Such a scenario naturally creates an increase in price. This increase is astounding, and in a free market, entrepreneurs, businessmen, farmer unions and cooperatives from all over the country would be trying to exploit this demand supply mismatch. The word “exploit”, with its negative connotations, does not do justice to the positive effect these non governmental entities would have had. To buy the onions at low prices and then sell them at high prices, cold storages would have to be constructed. After a small period of intense profiteering for early players, the laws of market equilibrium would have ensured that the farmer would get a stable price throughout the year, while the buyer would get a stable cost. Along the way, these profit seeking entities would have garnered the returns for the investments made in creating cold storages and other supply chain/logistics/storage facilities.
But this is not the case. Despite the business potential being through the roof, no one (until recently) has tried to enter the Onion markets at a big enough scale to make a difference. The reason, to absolutely no one’s surprise, is the government. The Indian government, confirming with the second “S'' word in the preamble, has passed various laws and acts (like the Essential Commodities Act) that give it the power to, in effect, seize stored crops from whoever they want, whenever they want. In theory, stock limits, and the power to seize excess stock, is meant to stop hoarding. It is a famine prevention measure. But every year, the moment onion prices rise (with no famine within sight for miles), upper middle class Indians can be seen beating their chests and pulling their hair on television. Political pundits start prophesying doom for the incumbents, causing the powers that be to panic and use every means possible to reduce onion prices. This invariably leads to the measures mentioned above, and often, these stocks are seized before the prices even rise, in a terribly ironic attempt at forethought.
What this means is that there is no security for any non governmental entity, be it an individual farmer, a large cooperative, or even a corporate monolith, to enter the onion business. Their investments in making cold storages and securing supply chains will all be for naught if the television anchors beat their drums of woe loud enough (and don’t they always). Furthermore, even if these crops aren’t seized, the Indian government has a terrible habit of banning exports when prices rise. This means that farmers will now have to sell their crops (if the government hasn’t taken them already) at a lower price. This not only takes capital from farmers and gives it to consumers, it further reduces the incentives to create storage facilities (as if the largest and most regulated bureaucracy in the world wasn't enough).
To add to the problem, those that should be taking care of the problem, the government, have somehow failed to do so (consistently) for the past 30 years. The bureaucracy, which was supposed to compensate for the lack of entrepreneurial investment, has instead eaten up the funds given to it for creating retail chains. The political hype is partially justified, off course. Onion prices have played an important role in some earlier elections, specifically in Delhi. Some might even say that they have been the deciding factor in the fall of various governments.
But every year, instead of easing regulation and promoting private investment, the government bows down to pressure and engages in the draconian measures allowed by the Essential Commodities act. ‘Hoarders’ are busted, stocks are seized, and all potential investors are scared away. In a cyclical process, the government tries to artificially regulate the market, which scares away private business, which in turn creates scarcity that leads to calls for the government to artificially regulate the market.
To conclude, onion prices in India are highly volatile. In certain seasons, farmers in rural Maharashtra have been pictured throwing their crop on the roads in despair as they fail to find fair prices. Then, as the supply chronically contracts, these prices rise to insane highs. In the stock market, a 10% gain would constitute an extremely profitable year. In 2019, for a limited time Onion Prices rose by 400%. Just for context, the Profit margin on a maruti Suzuki swift is 5-8%. For a McDonald's burger, it is around 20% (that’s the corporation's profit margin). For an iphone, the markup is 60%, and to give a more humble example, even on a bag of lay’s chips, no margin is estimated over 30%.
Thus, it is clear that the Indian system of regulatory control not only hurts farmers by not giving them a high purchasing price, but also consumers, by not giving them a low buying price. And in the midst of it all, it creates immense political chaos. What is required is a strong willed government that will be able to withstand the attacks from India’s institutionally entrenched Statist academics and allow the market to regulate itself within a few years, as it has done in almost every other nation in the world. The fact that we have had to wait so long for reform is testament to the strength of this lobby, which has been electorally disempowered like never before. Off course, there is still opposition, and a problem that has existed for the better part of our nation's history will not disappear in a single year. But the agricultural economy of India, for better or worse, has only one direction left in which it can travel. And that is upwards.
One must remember that this article has been the victim of oversimplification. The prices of onions are determined on a national scale, and are affected by a multitude of factors. In some cases, like environmental catastrophe, government intervention is more than justified. But overall, if the popular consensus in the agricultural-economics community is to be trusted, the onion farmers of our nation are widely underperforming and are victims of a complex bureaucracy. Unstable onion prices is an outlier in this nation as one of the few problems that have a simple solution. Until very recently, the lack of political will and widely held misconceptions were blamed for the government’s reluctance to embark on reforms. While the recent changes in the law do have their own problems, in this specific circumstance, for many, they are more than welcome.