Onion Price Rise: Searching for the Bad Guy?

Everybody is commenting on India’s onion price rise. The pseudo-economist in me also urged me to comment something. So, my two cents are here.

Onion always brings tears to our eyes: When its price rises it brings tears, when its price falls, it also brings tears. So, this time when price of onion rose to Rs 61/KG, government again blamed onion hoarders and bad monsoon. It is not new thing to read government blaming price rise of vegetables to hoarders.  As usual, it is believed that government also ordered raids on godowns where vegetables are stored.

The questions are:

1.      Is it a demand-supply mismatch?

2.      Is it due to bad monsoon?

3.      Is it the hoarder, the bad guy?

4.      Finally, is it the government policy like no MSP for onion and no cold storage for vegetables?

This Wall Street Journal piece made me little uncomfortable in digesting the cause and remedial measures. For the uninitiated, without reading you can guess correctly what the article is arguing. Because the name WSJ itself is sufficient. They will say hoarders are not responsible, it the mistake of market (I mean, the demand-supply mismatch) and let the government watch the situation and let the market take care of onion price rise. Well, they say that bad monsoon and market speculations are also partly responsible. They say:

Of course, weather and market speculation play a part but the fundamental issue is a supply and demand mismatch that is causing the volatility, not an onion mafia. Demand for onions is rising along with the incomes of the average Indian. But farmers are discouraged from growing enough onions because of government interventions aimed at keeping prices down.

Hmm…..that is okay. But then they quote this:

When onion prices rise, the government steps in to block profitable exports and to knock down domestic prices, said Changdev Holkar, former director of the state-run National Agricultural Cooperative Marketing Federation of India Ltd.

I have a little problem here. If you analyze two statements here you see they talk about demand-supply mismatch and profitable exports. By profitable exports they mean export price has risen. Thus, the question is which demand-supply mismatch they are talking about: India or Global? I think it is pretty clear that they are talking global demand-supply mismatch. If this is so, then global demand-supply mismatch should be blamed for domestic demand-supply mismatch. Think of this. Suppose the demand = supply in the domestic market. But global demand > global supply. As a result, global price rises. Seeing higher price and higher profitable opportunities, domestic (Indian) producers, read TRADERS, will export more. And this will cause a domestic demand-supply imbalance. If this argument is right, then I think banning exports is a solution in right direction. Another way to think is when domestic price is rising why are they still selling in foreign market or exporting? Obviously, the export price is higher (marginally or substantially?) than domestic price. Else, they won’t export, right? If you ban exports, then traders cry foul.

The other non-trivial question is: what kind of good is onion (from a microeconomics point of view): Normal, or inferior?  

When import price becomes cheap, why do domestic corporates cry foul and urge government to ban imports or raise import prices?  Why do they do that? If due to global demand-supply mismatch (demand > supply) domestic consumers has to pay a higher price, then why do they complain when global demand-supply mismatch (supply > demand) results global price plummet and consumers also want to benefit from that? Why don’t you advise government then to tie its hand and let the market do the job?

It also argues for MSP for onion. Though, I have sympathy for this suggestion, yet the pricing or MSP hikes become more political. Some economists squarely blame food inflation to MSP hikes. They argue MSP hikes are not correlated with cost hikes and is is motivated by election. Thus, when there is a growing demand for MSP abolition of certain commodities, to what extent this suggestion (MSP for onion) makes sense has to be evaluated carefully. I leave it to you.