India: The Economics of Onions

Many believe the subcontinent's economy is tied to the price of the tear-inducing vegetable, a staple in the country's diet

Like most people in India, economist Basanta Pradhan keeps track of the price of onions because the vegetable is a public weather vane of the state of the economy.

Onions are part of virtually every dish and are served with lime as an appetizer in every restaurant. When prices jumped in February to around 25 rupees (US$0.51) per kilogram, people started complaining and doomsday newspaper headlines began to appear.

"Onions are consumed by everybody so you cannot afford [for] onion prices to go up," said Pradhan. "Now the price of onions is very high. A good price would be less than 10 rupees but it went up to 25 rupees two or three days ago. Now it's down to 18 rupees.

"People are very aware. The government may lose an election [over onion prices]."

This is what happened in 1998 when the Bharatiya Janata Party lost two state-level elections following a six-fold jump in prices. In 1980, increasing onion prices sidelined the now defunct Janata Party.

The situation is serious enough to have made its way—unprompted—into remarks made by the finance minister Shri Chidambaram the day after releasing the country's latest budget on February 28.

"When onion prices are up, onion farmers get better prices, but onion consumers complain," he observed.

Obviously, the debate goes deeper than just the price of a single vegetable—it is about inflation, which is surging as the economy booms. A Deutsche Bank report on February 28 noted that urban inflation has been rising in India since mid-2004 to a high of 7.4% in January, a seven-year high.

Government data released in mid-March pegged annual inflation at 6.1%, well above a target of 5-5.5% at the end of March.

This inflation is largely driven by rising food prices, the result of a supply side bottleneck which is, in turn, created by a trifecta of factors.

Inefficient production, led by the two-thirds of the country's population whose livelihoods are driven by subsistence-level agriculture, is one. Another is poor infrastructure—an abundance of onions in some states can drive prices down to a tenth of urban rates but there is often no way to transport produce to the cities before it begins to rot. A final factor is rising sales abroad, as India becomes a food-exporting nation.

Onion prices retreated from the 25 rupees per kilogram level but people are still keeping a close eye.

"These are really big issues in India," said Pradhan.

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