Why is there an unanticipated upsurge in onion prices? Is that because there is genuine ?black swan? or is it a failure of policy? Onions are not a one-off annually harvested crop. The supplies arrive weekly as new crops ripen. The demand is also not seasonal but continuous through the year. Ministries of agriculture have to be able to forecast prices regularly, taking into account weather forecasts and any other likely movements in economic variables. This should happen to the entire set of agricultural commodities.
Given that there was an unseasonal rainfall in Maharashtra a month ago, it was predictable that the delivery of onions would dip with a lag. This would lead to an expectation of a price rise and would be reflected in any futures market. The government can then take remedial action by downsizing stocks, assuming there are such stocks, or by encouraging imports.
Politically, we know that the price of onions is a sensitive indicator of people?s happiness or misery with their daily life. Onions are something of a necessity that people buy frequently, if not daily. They are thus sensitive to its price movements. The people have witnessed a very sharp bubble in onion prices. The question is: is this systemic or will it burst?
Sharad Pawar is taking the view that, left to itself, the bubble will burst since new supplies will arrive. He has advanced no evidence for his belief. One would expect the agriculture ministry to have a cell for forecasting food prices and if there is such a cell, we should know its forecasts.
India has always led in statistics and econometrics. It has pioneered agricultural research since PUSA was founded. If, therefore, the government was surprised by the upsurge in onion prices, it must be either because the government had their models and they failed to predict or because they did not have any models at all.
The reason for thinking that it is a failure rather than bad luck is that this has happened once before to the NDA government. It has to do with certain well-established political superstitions that pervade policymaking. First is the suspicion of markets and of traders. If forward prices had reflected the oncoming shortage, there would be a violent criticism of such movements. Shoot the messenger is the rule. Since market traders take such signals seriously, we get a heightened rise in prices. This then leads to a denunciation of hoarders rather than a criticism of the policymakers who fail to act on the data provided by the market.
This syndrome is, sadly, common to all Indian political parties. Populism has never understood economics and its b?te noire is the small trader who is, by definition, a hoarder. Yet, the same populism leads politicians to oppose the modernisation of retail trade by allowing either FDI in retailing or even large Indian corporates. Thus, we do not have the smoothing of inventories and the use of sophisticated forecasting tools that would reduce the volatility in prices. There is ample evidence that with modern retailing, with its secure long supply chains, farmers gain in terms of the share of the price they receive relative to the final price. If the consumer today pays too high a price relative to the price the farmer gets, it is not because the middlemen are bloodthirsty monsters but because they are small and inefficient. The modernisation of retail trading will simultaneously (a) raise the price the farmer gets relative to the final price (b) squeeze the margin between the farmgate price and the consumer price and (c) reduce volatility.
The approach in India is to politicise the issue. There will be many who will see the rise in onion price as ?market failure?. This is because they see all market operations as failure. Thus, rather than improve policy by using market logic smartly, they prefer to ration quantities and suppress the price mechanism. This may lead to artificial subsidies for luxury products such as petroleum as much as low prices that cause products to disappear.
In 1991, India began its escape from the larger absurdities of the previous 40 years of distrust of markets and industrialists. The macroeconomic picture has, no doubt, improved radically. But there has been no corresponding commitment to microeconomic efficiency. Thus, the idea that people starve not because of shortage of food but because of lack of purchasing power has been the most convincing lesson Amartya Sen has taught the world with his analysis of famines. So if you want to avoid the possibility of starvation, give people money to buy food. That is more efficient. Yet the government is about to pursue the inefficient alternative in its impending Food Security legislation.
The author is a prominent economist and Labour peer