Another policy disaster

The Government's apparent inability to prevent the extraordinary escalation in onion prices might just be symbolic of the general effect of the Government on the economy.

JAYATI GHOSH

ONIONS have been highly political vegetables for some time now. Ever since Indira Gandhi successfully used the issue of the high price of onion in her election campaign against the Janata Party Government, it has become a sort of barometer for political fortunes. So the Bharatiya Janata Party-led Government's apparent inability or unwillingness to prevent the extraordinary escalation in onion prices in the past months must count as more than simply one more in a string of failures and blatant policy disasters. It might just be symbolic of the general effect of this Government on the economy, and contribute to its broader rejection by the people.

Clearly, the importance of onions extends far beyond their quantitative weight in the food basket. In North India, onions are seen not only as a basic ingredient in the cuisine, but also as an important element in the basic diet of poor people, in addition to foodgrain. The issue is so major, precisely because it reflects a wider trend in the prices of essential items. This onion inflation is not a special or isolated occurrence, but rather a part of a general increase in food prices.

Overall inflation has already accelerated, with the price level increasing by 6 per cent between March and September this year, reflecting a high annual rate in the two-digit range. This is still low compared to the soaring inflation in food items, evident since April, especially since mid-August. The most massive increases are in the prices of fruits and vegetables (including, of course, the now-celebrated onion) by more than 48 per cent in these six months alone. The other substantial increase has been in the prices of edible oils, which have gone up by nearly 20 per cent in the same period. Once again, this is an essential item of consumption even for the poorest households. It is the fact that this highly inflationary period also coincides with the period in which the BJP-led Government has been in power at the Centre, which inevitably gives these figures a political significance as well.

Government spokesmen have tended to argue that high food prices reflect the seasonality of price changes, especially in food items, and that the issue is being played up for political reasons. However, it is clear that the rate of price increase since March has been substantially higher than warranted by the seasonality factor. If the seasonality factor was all that there was to the current inflation, the producers of primary products would have received high prices when they sold their harvest, with consumers paying only a normal trade mark-up over this. But it turns out that during October-December 1997 and March-June 1998 - the arrival periods of kharif and rabi harvests - food price inflation was very low and foodgrain prices were actually less than in the corresponding periods of the previous year. Even in the case of onions, the prices during the rabi harvest in April 1998 were not substantially higher than in April 1997 and less than during the kharif harvest during November 1997.

Thus, farmers actually received a lower price for their produce in the past year. So the subsequent large increases in food prices borne by consumers reflect post-harvest hikes which have been much larger than what is seasonally normal, with the benefits clearly accruing to stockists and traders.

C. RATHEESH KUMAR
The speculative price rise is now feeding into the sale of other vegetables.

Another official explanation for this extraordinary jump in food prices over the past six months has been that adverse supply conditions have been responsible for the increase. Thus, vegetable output, and particularly the supply of onions, have been badly affected by the uneven and excessive rainfall, followed by flooding in several parts of the country, and vegetable prices have therefore increased. Similarly, the rise in the prices of edible oils is sought to be explained by a shortfall in oilseeds production and, later, the controversy surrounding adulterated mustard oil, as a consequence of which it was removed from distribution in several States after the outbreak of dropsy. This meant a substantial decline in the oil supplies available in the market.

Once again, it is fairly clear that this explanation is inadequate. The rise in the prices of food items has been far in excess of anything that could be warranted by the reduced supplies. To take the most infamous example, it has been estimated that there is a shortfall of about 15 per cent compared to the normal in onion supply this season, but the rise in retail onion prices has been more than 500 per cent. Similarly, for other fruits and vegetables, the proportionate rises in wholesale and retail prices have been many multiples of any percentage decline in output. In the case of edible oils, price increases have been much faster and steeper than reductions in supply, and prices have gone up sharply even in States where no ban was imposed on mustard oil. There can be no doubt that speculative forces have played a major role in pushing up the prices of these items.

In any case, even where there are domestic or local supply shortfalls in important food items, large price increases need not automatically result. Given the current comfortable situation with respect to foreign exchange reserves (which are now in excess of $26 billion), the Government has been in a position to import any major commodity in which a shortfall is evident or even likely. The reduced supply of fruits and vegetables, including onions, was evident from early July, and a prudent government could have taken measures even at that point to ensure that no speculative pressures on such commodities would arise. Thus, measures such as restricting onion exports, putting onion imports on the Open General Licence, or even undertaking for bulk imports through state agencies could have been put into place several months ago.

Instead, the Government chose to wait until the matter had reached crisis proportions, and even now the scale of the official response in terms of providing additional supplies is far below that required to quell speculative pressures. In fact, it might be plausibly argued that extremely well publicised populist gestures, such as offering to sell onions at Rs.10 a kg when market prices were four times as high, without ensuring additional supplies, merely fuelled speculative pressures further by increasing panic and inflationary expectations. It may also explain why the speculative price rise is now feeding into the sale of other vegetables such as potatoes, for which supply shortfalls are not so evident.

These speculative pressures had in any case been intensified this year by the fact that other channels of investment remain uninspiring for investors, given the sluggish stock market and the continuing recession in domestic industry. So once more, speculation in food items - a feature of the Indian economy in the 1960s and 1970s - has become a pervasive factor even in determining overall rates of inflation. This tendency has certainly been encouraged by acts of omission and commission on the part of this Government.

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