Modi’s Anti-Inflation Moves Seen Failing by Onion Traders

Photographer: Kuni Takahashi/Bloomberg

A worker holds harvested onions for a photograph on a farm near Chandwad, Maharashtra, India. Close

A worker holds harvested onions for a photograph on a farm near Chandwad, Maharashtra, India.

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Photographer: Kuni Takahashi/Bloomberg

A worker holds harvested onions for a photograph on a farm near Chandwad, Maharashtra, India.

Arun Kumar has seen many Indian governments try and fail to eliminate middlemen at produce markets who are blamed for hoarding and stoking inflation. He expects nothing to change under Prime Minister Narendra Modi.

Kumar, who has bought and sold produce at Delhi’s biggest food market for three decades, said measures announced two days ago to ease restrictions on sales of fruits and vegetables had no immediate impact on prices. Farmers don’t have the experience or capital required to sell directly to consumers, he said.

“This is like Coca Cola selling drinks to the man on the street by bypassing bottlers and the distribution chain,” Kumar said yesterday while supervising a delivery of onions in Azadpur Market, which is among the biggest fruit and vegetable markets in Asia. “Is it practical?”

Modi’s three-week old government is pushing to rein in Asia’s second-fastest price gains with steps to overhaul a six-decade old practice of collusion among fruit and vegetable traders. Finance Minister Arun Jaitley said two days ago that farmers will be able to sell fruits and vegetables anywhere they wish rather than only in state-controlled markets.

“These are temporary measures and will not have any long-term impact on prices,” said A.V. Manjunatha, agricultural economist at the Bangalore-based Institute for Social and Economic Change. “The more scientific approach to curb prices would be to study land under cultivation for vegetables, prepare contingency plans and cut down post-harvest losses.”

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A laborer sorts onions at the Agriculture Produce Market Committee wholesale market in Lasalgaon, India. Close

A laborer sorts onions at the Agriculture Produce Market Committee wholesale market in Lasalgaon, India.

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Photographer: Dhiraj Singh/Bloomberg

A laborer sorts onions at the Agriculture Produce Market Committee wholesale market in Lasalgaon, India.

Wasted Food

Fruits and vegetable spoilage runs as high as 30 percent of production. Only 2.2 percent of domestic production is commercially processed, compared with 65 percent in the U.S. and 23 percent in China, according to a report by the Federation of Indian Chambers of Commerce and Industry.

Reserve Bank of India Governor Raghuram Rajan this week called for “appropriate food management” to bring down prices that have boosted the inflation rate over the last couple of months. He held the benchmark repurchase rate at 8 percent on June 3, and said further tightening won’t be warranted if consumer-price inflation stays on course to hit 8 percent in January 2015.

Consumer prices rose 8.28 percent in May, while wholesale price inflation accelerated to the fastest pace in five months. Food prices make up about 50 percent of the CPI basket, compared with 15 percent in the U.S. and 24 percent in Brazil.

Monsoon Risk

The rupee, among Asia’s top performers this year, rose 0.8 percent to 59.9150 per dollar as of 9:41 a.m. in Mumbai today, according to prices from local banks compiled by Bloomberg. The yield on the government bond due November 2023 fell to 8.63 percent from 8.67 percent yesterday, and the S&P BSE Sensex (SENSEX) gained 0.5 percent.

More than half of India’s farmlands get water from the June-September rainfall, which has been 45 percent below normal so far, threatening to boost prices further. A 10 percent drop in rainfall may add more than a percentage point to the consumer-price index, and a “full blown drought” risks shaving as much as half a percentage point off economic growth, according to HSBC Holdings Plc.

After an emergency meeting two days ago, Jaitley said the government would ask states to crack down on hoarders, aid imports of pulses and cooking oil, and fix a minimum export price for potatoes and onions to discourage overseas sales. Food Minister Ram Vilas Paswan said India will offload about a quarter of its rice stockpiles.

Trader Rackets

The “bold, proactive steps” are “strong indicators of the government’s resolve to address food inflation and should assuage the RBI that the government is now walking in lockstep with it to address high inflation,” Deutsche Bank AG analysts led by Abhay Laijawala wrote in a note yesterday.

The current system dates back to the 1950s, when state governments -- which have constitutional powers to regulate farming -- sought to prevent farmers in remote areas from exploitation by setting up markets with licensed traders and transparent sales.

Over time, the licensing system turned into a monopoly in many states, with traders organizing to prevent new entrants and stifle competition, according to an Agriculture Ministry report published last year.

The previous government targeted the rackets last year after a jump in onion prices led to defeats in state elections to Modi’s Bharatiya Janata Party. Government officials accused middlemen of hoarding as prices quadrupled while heavy rains crimped supplies.

‘Five-Minute Job’

While some of India’s 29 states -- including Uttarakhand and Himachal Pradesh -- have already changed laws to allow farmers to directly sell fruits and vegetables to retailers, others have resisted the proposed changes. Two calls placed yesterday to the mobile phone of D.S. Malik, a finance ministry spokesman, weren’t answered.

Jaitley’s proposals will reduce commissions and “usher in a revolution in marketing if other states also implement it,” said Ashok Gulati, a former chairman of the Commission for Agriculture Costs and Prices, a body that recommends minimum guaranteed farm prices to the government.

“Commission agents make money without taking any risk for a five-minute job,” he said.

In Delhi’s Azadpur market, about 3,600 wholesalers look to purchase fruits and vegetables delivered daily from hundreds of trucks. Sacks of produce are stacked up across an area about the size of 40 soccer fields.

‘Nothing Changes’

Pravesh Tyagi, an onion trader, says hoarding is impossible, particularly in heat topping 40 degrees Celsius (104 degrees Fahrenheit). He pointed to a sack of onions that he hasn’t been able to sell for two days.

“We barely make ends meet with our trade,” Tyagi said. “How can we hire warehouses to hoard when we are hand-to-mouth?”

Kumar, who has been working at the market for decades, said India doesn’t face a food shortage and the government is overreacting.

“In my three decades in the trade, I have seen such moves by governments at least three or four times,” Kumar said as a group of women sorted onions based on their size and shape. “Nothing changes.”

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net

To contact the editors responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net Jeanette Rodrigues

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