Sometimes it is worth quoting newspaper editorials at length, not for their intrinsic interest, but because they accurately reflect the nonsense being talked at large. The following is the full text of an editorial of the Economic Times, the country’s leading business daily ("Crying over onions", 19/8/98):
"Onion prices have skyrocketed because of a bad crop. There is also the general inflationary condition at work. So how do we tackle such a situation? We would say, if local supplies are a problem, open up to imports. These can come even from neighbouring countries, which might have a better crop. Instead, what does the State do? It closes down the market. It forces our farmers to forego exports — which would yield them higher revenues — and sell to domestic consumers at what is effectively a subsidised price. In this case the farmers are doling out the subsidy; but the State is not stepping back, either, and its civil supplies departments are quite active in procuring onions and selling them below market prices. Is this sensible?
"We do not think so. In the first place, it is extremely dangerous to have a stop-go export policy. If onion farmers have found export markets, they must be allowed to service them. Denying them even this may cause these markets to dry up. This could even curtail domestic supplies, if the incentive to grow onions in the next season is damaged. Secondly, onions are not an essential nutrient — so there is no reason for the State to step in to feed the poor as though a famine has struck the land. The State as an onion trader heaps higher economic costs than all the middlemen combined would have done had the market been allowed to function to its full capacity. Middlemen competing with each other earn small margins. The State as a loss-making onion trader spends much more social resources — and these funds are badly needed in many other areas. Further, onions are both substitutable as well as processable. When onions become dear, dhabas provide their customers radish salad instead. Someone might come up with synthetic onion essence, for example. When the market is allowed to function, unexpected solutions turn up. The heavy hand of the State (whose overspending is causing inflation anyway) works like a bull in a china shop. Free onion imports as well as exports. Put agricultural products on the OGL (Open General Licence, ie, the list of items importable without restriction)."
The above accurately reflects the understanding of the Government and the World Bank on domestic price management and agricultural trade. Naturally, it is riddled with incorrect statements.
(1) Onion prices have not skyrocketed merely because of a bad crop. The following table shows that the 1997-98 crop was about 3.4 per cent lower than the previous year, not low enough to warrant such extraordinary price rise — from Rs 5-6/kg in 1997 to over Rs 40/kg now (October 5). (Admittedly certain onion-producing centres fared worse than others, but the following are the all-India figures.)
Table 1: Production of onions (million tonnes)
| 1990-91: 3.2 |
| 1991-92: 3.6 |
| 1992-93: 3.49 |
| 1993-94: 4.01 |
| 1994-95: 4.04 |
| 1995-96: 4.08 |
| 1996-97: 4.43 |
| 1997-98 (est.): 4.27 |
| 1998-99 (projected): 4.20 |
Source: Centre for Monitoring the Indian Economy.
It is possible that the above estimates are high; and it is true that rains have led to greater spoilage of the harvested crop than in normal years. Yet even the most pessimistic estimates put the supply at 15 per cent below normal. This cannot account for 600 per cent price rise.
(2) The real reasons for the scale of the price rise are: one, large exports, and two, hoarding by big traders.
Onions account for 90 per cent of India’s vegetable exports, and earned exporters Rs 385.6 crore in 1996-97. But there was unusually high international demand during the last twelve months, since bad weather conditions had spoilt the onion crop in several producing countries. It is reported that four to five lakh tonnes of onions were exported over the last year (Times of India, 30/9/98) — that is, about 10 to 12 per cent of the crop.
When international prices rise, as they did during the last year, and when export of agricultural products is liberalised, traders naturally prefer to divert their supplies to exports. This in effect raises domestic prices to international levels.
In January 1998, domestic prices had risen steeply to Rs 20-25/kg. The Gujral government, anxious about the upcoming elections, temporarily banned onion exports in January; the retail price fell immediately to Rs 6-8/kg. However, the ban was soon removed, whereupon large exports took place — 1.5 lakh tonnes in the period April-July alone. The domestic retail price soared to over Rs 30/kg.
In August, Union commerce minister Ramakrishna Hegde met a delegation of the Shiv Sena which asked him to ban the export of onions, and even threatened to physically prevent their export from Bombay. (As we shall see, this was the height of hypocrisy.) When Hegde said he would "consider" such a ban, prices in the wholesale trade immediately crashed. However, it shortly became evident that in fact there would be no such ban. Rather, at the end of August the Cabinet Committee on Prices refused to ban onion exports. Prices quickly rose again. The evidence of the impact of exports on domestic prices could hardly be clearer.
(3) Apart from exports, it is massive hoarding that is taking its toll. By aggravating the shortage and unloading at higher prices, big traders are reaping extraordinary margins. In its memorandum in August the Shiv Sena claimed that big traders in Nashik district of Maharashtra had hoarded as much as two lakh tonnes of onions — when the normal production in Nashik district (one of the largest producers in the country) is just two to three lakh tonnes. The question is, why did the Sena need to petition the Centre on this question, when the Shiv Sena-BJP government in Maharashtra itself could have used the Essential Commodities Act to act against hoarding?
Now the Shiv Sena has dropped any mention of the hoarding by traders, and is demanding that the Centre import onions for Maharashtra, as it is doing for Delhi.
(4) According to the World Bank and its supplicants, ‘market forces’ induce economic efficiency by sending ‘price signals’. That is, rising onion prices abroad and at home reward the onion grower with higher profits; he in turn grows more onions; this leads to greater total production; this happens till the increased supply brings down prices. So runs the theory. The Economic Times, styling itself improbably as a defender of peasant interests, tells us that "If onion farmers have found export markets, they must be allowed to service them" — failing which, we are warned, peasants would have no incentive to grow onions, and even domestic supplies would fall.
This is unreal. The onion-growing peasant has hardly any chance to "find" domestic markets, let alone foreign ones. When his crop comes in, he is unable to hold on to it for better prices in the future: first, he is poor, and generally in a desperate hurry to pay off his debts; and secondly, he does not have the expensive ventilated godowns or cold storage of the type needed to store onions and prevent them from spoiling. Hence he has to get rid of his crop quickly, at whatever price it can fetch. All the other onion growers are trying to hawk their crop at the same time; so it is a buyer’s market. The peasants’ crops are purchased by arhatiyas (commission agents) for Rs 3, 2, or even one rupee a kilo. The peasant’s break-even price is reportedly Rs 2.50 to 3 a kilo. He is left without any surplus.
On March 9, 1998, onion prices at Pimpalgaon, Nashik district, were as low as Rs 1.50/kg. In April, peasants threatened to stage a rail roko at Lasalgaon (the country’s biggest onion market yard) to protest the falling prices of onions. When we enquired from traders in the first week of October 1998, onions were being bought in Nashik district from peasants in the range of Rs 100-300 per quintal (Rs 1-3/kg). The same, new, onions were being sold by big traders in the New Bombay wholesale market at ten times the price — Rs 1,000-2,700 per quintal (Rs 10-27/kg), according to the head of the association of onion and potato traders. (Old onions from the rabi harvest are being sold at Rs 3,500-4,500 per quintal, or Rs 35-45/kg.) Although the price the consumer pays is even higher, we can see that the main profit is not made by the lowly vendor, but by the big traders.
Of course, it is the big traders, not the peasants, who actually export. So the peasant, who in no way benefits from those "price signals", continues producing as he did before. In a situation where agriculture is structurally crippled (where the direct producers are under the thumb of parasitic forces — landlord, moneylender, trader), increased commercialisation does not lead to increased productivity, but merely to increased extractions from the producers. [Even when a peasant does receive higher prices at a particular time and "responds" to such "signals" by producing more, the result may not be so happy, given the nature of agriculture and agricultural commodities trade. For example, after international cotton prices rose steeply a few years ago, and India’s cotton/yarn exports grew rapidly, peasants grew more and more cotton by increasing the area under cotton. But for the last two years cotton prices have been low, indeed unremunerative. Cotton growers, having "responded to price signals" and ploughed in large investments, have been making losses — to the point where some have even committed suicide.]
(5) We are told that the correct way, the approved World Bank-WTO way, to curb onion prices is to "open up to imports". The flood of imported onions would reduce domestic prices.
There are numerous reasons why this makes no sense. First, we should be careful about importing any crop that may bring in diseases or weeds alien to our agriculture, with potentially disastrous effects. A number of official committees have specifically warned about such dangers, for example in relation to wheat (recall the diseased Australian wheat recently imported) and oilseeds imports. Secondly, even if international prices are lower than domestic prices, high transport costs frequently make imports uneconomical. Thirdly, and most importantly, if international prices are high, imports do not dampen domestic prices. In the case of onions, domestic prices were in fact fuelled in the first place by the fact that high international prices led to diversion of onions from the domestic market to exports. Further still, when a country as large as India declares its intention to import substantial quantities, international prices shoot up. This is what happened during the 1994 sugar scandal (see Aspects no. 14, pp. 8-17). (According to the head of NAFED, after the Government made the decision to import onions in October, onion prices in the international market rose from around $240/tonne to $330-350/tonne. The landed price of the imported stocks reportedly works out to around Rs 21/kg — no different from the wholesale price of local onions.)
Going by current prices, imported onions would wind up costing at least Rs 30 a kilo by the time they reach the consumer — that is, imports would have no dampening effect on prices. That has not deterred the BJP government from announcing that it would import some onions and sell them at Rs 12/kg in some domestic markets (chosen according to where the BJP faces its next elections). But the quantity they plan to import — 10 to 15,000 tonnes — is ludicrously small, and will have no impact on nationwide prices. (There are also reports that some of the onions imported are rotten.)
The Centre’s willingness to risk unpopularity by allowing such extraordinary price rise is a good indication of the clout of big traders. But it is not only domestic traders who have influenced Government policy. Far more importantly, the World Bank and now the advanced countries in the World Trade Organisation have persistently demanded that India do away with restrictions on agricultural imports. Whether in the case of oilseeds, wheat, or onions, an organised lobby of foreign interests has been using the occasion of severe shortages and price rise to press for opening up to agricultural imports as the solution. A flood of editorials in the press have urged the same. This is so whether or not major foreign corporations are involved in that particular trade: their attempt is to create a set of precedents for, and the aura of popular sanction for, agricultural imports.
(5) There is in fact a very simple domestic solution to the onion price rise, as well as to the price rise in certain other vegetables, such as potatoes. It is the task of the National Cooperative Agricultural Marketing Federation (NAFED) to carry out "market intervention" for various crops, such as potatoes, onions, chillies, ginger, black pepper, and some fruits. The logic is that (as mentioned earlier) peasants are generally helpless before the traders at the time of harvest, and are forced to part with their crop at absurdly low prices (for example, last year potato farmers were reportedly selling their crop at 50 paise/kg.) Moreover, sheer paucity of infrastructure for storage and transportation leads to large-scale wastage: reportedly, upto a-third of the onion crop actually harvested is lost to spoilage. Finally, the consumer winds up paying unjustifiably high prices, owing to the stranglehold of big traders. For all these reasons, it makes eminent economic sense for NAFED to set up infrastructure for storage and transportation, purchase vegetables from peasants at remunerative prices, and sell them to consumers (or to small vendors) at reasonable prices.
In the case of onions, it would have been feasible, without any subsidy, for NAFED to have made large purchases from onion growers throughout the country and to have distributed onions through the Public Distribution System at Rs 8 to 10/kg. The only losers would have been parasitical forces — exporters and hoarders. The gainers would have been the overwhelming majority of people, for whom onions are today a necessary part of their diet.
However, this would have run directly against the thrust of World Bank dogma and Government policy. In its key document on India’s agriculture (India: 1991 Country Economic Memorandum, vol. II), the Bank calls for reducing market interventions, liberalising domestic trade in agricultural products, and encouraging agricultural exports. In its latest document, India: 1998 Macroeconomic Update, it tells the Government to "Allow agricultural... prices to increase by linking them more closely with world prices by eliminating controls on international trade including canalization (import restrictions will be phased out by 2003) and phasing out controls on domestic trade, such as movement and storage controls..."
Among the "movement and storage controls" the Bank is opposed to is the Essential Commodities Act, which is intended to prevent hoarding. An orchestrated campaign has been going on in the press for the scrapping of this hardly-ever-implemented Act. According to news reports, the stringent provisions in the ECA have already been allowed to lapse (Times of India, 30/9/98). After all, when the international agribusinesses move in to control India’s agricultural trade, they would hardly like any sort of legal restraint on their commercial profit-making activity.
Meanwhile NAFED’s purchases, never large, have become irrelevant to the peasant. Take the case of chillies, of which A.P. is the biggest producer: In 1996, chillies fetched Rs 25/kg in Guntur, and acreage under chillies increased; as a result, by 1997, prices fell to Rs 18, and further to Rs 10-15 by September 1997. This would not cover even the costs of production. The Union minister of agriculture, the CPI leader Chaturanan Misra, instructed NAFED to purchase chillies at the price of Rs 22 to 50, in order to boost prices; but since the quantity it was told to purchase was contrarily just 1,000 tonnes, it had no effect on prices. Production in A.P. alone is about four lakh tonnes, and nationwide about eight lakh tonnes. (A similar scene took place in Guntur in February 1998, with traders manipulating the price suddenly downward by Rs 10/kg, to the distress of the peasants.)
As we write, news appears of a firing on peasants in Sira town of Karnataka’s Tumkur district on October 28, in which at least four peasants were killed and 15 others suffered bullet injuries. The peasants were enraged by the sudden drop in groundnut prices at the Agricultural Produce Marketing Committee yard of Sira. [NAFED is being kept busy buying onions for the Delhi market by the current Government. Interestingly, it is not buying directly from the Nashik peasant, as that would incur the wrath of the traders by driving up the traders’ purchase prices. Instead, it is buying from the traders in the New Bombay wholesale market. Onions are reportedly being sold in Delhi by the Government at just Rs 10 a kilo — a hefty subsidy, which would be unnecessary if NAFED had purchased directly from the peasant.]
We are told by free-market advocates that State intervention is inefficient, and leads to misallocation of resources. Let us make a simple calculation. As we have seen above, big onion traders are earning margins at least Rs 10 to 15 a kilo over their normal margins. Let us assume they are doing so on half the onion crop, ie, about two million tonnes. That means at least Rs 2,000 to 3,000 crore are flowing into the pockets of big traders in excess of their normal profits. This sum is extracted from the Indian people, particularly the poor, whose diet cannot be so easily changed and for whom onion is a necessary ingredient in their staple foods such as dal as well as its raw form. This giant flow from the poor to an unproductive, indeed parasitical, class is economically inefficient. The further impoverishment of the masses of people is not only bad in itself; the all-round rise in prices of foodstuffs also will mean that demand for manufactured items of mass consumption will decline — which in turn will deepen the current industrial recession.
Whereas State intervention, apart from ensuring that the consumption of the poor is not further depressed, could also have ensured that onion producers get prices that will leave them some surplus — with which they could improve their output and their own storage facilities the following year. It is worth noting that the per hectare yield of onions in India is the same today as it was twenty years ago — or even less since production has grown solely due to additional area being brought under onion. Even Gujarat, the state with the highest per hectare yield, has witnessed no growth in yield over the past two decades. The biggest producer, Maharashtra, has seen yields actually decline, from 163 quintals per hectare in 1978-79 to 121 quintals in 1995-96 (the last year for which we have data).
By any serious definition of economic efficiency, it is obviously crucial to keep down margins earned by parasitical, unproductive activity, and maximise the income of producing sections — whether workers or peasants. The 1998 onion crisis is yet another illustration of the parasitism that reigns over the productive economy of India.