Friday, January 28, 2011

The Price of Onions

The price of onions doubled in December to over Rs.50/kg, causing an agony of hand wringing and finger pointing in the press. What started as a minor price fluctuation became over the course of a month the focus of a national debate. What was going on? Why so much talk about onions?
On the surface, it might appear to be simply about onions but like many things in India, it’s complicated. Onions came to represent deeper issues troubling a rapidly changing society-- inflation, the plight of India’s farmers and a need for agricultural reform. The proximate cause for the onion problem was a lingering monsoon that flooded fields and destroyed much of the crop. The result; prices went up. A variation of this scenario plays itself out every year with differing crops but this time the situation caught everyone’s attention and a host of issues entered the debate.

The first response of government ministers was, a la Captain Renault in Casablanca, to “round up the usual suspects.” In this case, that meant catigating “hoarders,” “middlemen” and “market manipulators.” That always plays well and it may even be true, but no one really believed much would come of it. This was followed by photos of the police confiscating bags of onions from wholesalers’ warehouses. No one clarified exactly who these manipulators were and I'm not the only one who wonders what happened to those bags. A few small voices mentioned how onions can’t be hoarded very well because they dry and lose value within one week, but nobody wanted to hear it.

Vying for the lead with response #1 was the old standby; blame the “incompetent, inept, short-sighted, and foolish” policies of the government in power. “It should have been anticipated!” “Why isn’t more being done?” “The aam aadmi (common man) once again suffers at the hands of the capitalists.” Under verbal assault, the Agriculture Minister gave assurances, deflected blame, and called for reform. The Prime Minister met with his Cabinet and initiated “investigations”. Local administrators ducked for cover.

When outrage showed no signs of abating and prices kept rising, the government put into motion Standard Response #3. It banned exportation of onions (or potatoes, rice, wheat, kerosene, steel or whatever happens to be the shortage of the month). A governmental spokesman said something along the lines of, “If rapacious, conspiring traders are prohibited from selling their onions to greedy foreigners (read: Pakistanis? Americans?), we’ll show them our resolve. Mother India will stand up! We’ll force the traders to sell cheap to the home market.” Traders, faced with a loss, liquidated what they could, spoilage took the rest, and then they simply suspended business until further notice. Shortages ensued. Prices rose.

Finally, things returned to normal when farmers began harvesting the next onion crop. This sequence will be repeated when the next shortage comes, but this time I found it refreshing to see more attention paid to serious, underlying issues. I don’t expect much to be done, but one of these days, enough momentum will be generated to initiate change.

The cost of food has been rising at a 20%+ annual rate for the last few years, far above the national inflation rate in other sectors. Tellingly, prices have not inflated above average for grain. Why? India’s diet is changing as it becomes more prosperous. A rapidly expanding, urban middle class is no longer content with only dhal, rice and chapattis now that it has money to buy a broader array of fruits, vegetables, dairy products and meat. Demand for dairy products, eggs and poultry is fast on the rise in all parts of the country. Indians are growing bigger with each generation as more protein is consumed. Although pockets of malnutrition remain, the general improvement in national health can be attributed largely to an improved diet. When the demand for a commodity rises and the supply is static, prices go up.

The logical response to increased demand, if you want price stability, is to increase supply, but this takes time, investment, planning and incentives to those who grow the food. India immediate need is not to grow more food but to better utilize what it has. Indian farmers produce abundantly but it’s said that 40% is lost before it reaches the consumer, mostly due to poor storage, bad transportation, lack of infrastructure and inefficient distribution networks. Whatever the real number, the percentage is huge and government is unable to address it effectively.

Caught in the middle is the vulnerable Indian farmer. Without proper storage and faced with his crop going to waste, he is at the mercy of middlemen who dictate prices. Since most Indian farms are small, the farmer is usually too poor to invest in his own storage and the government seems unable, or refuses, to step in and build proper facilities. Vast amounts of food sit unprotected from the elements and rot. Most farmers are tenants, paying rent to landlords, and cannot borrow from banks to make their own improvements even if they had the will to do so. Most must borrow for seed and fertilizer and are forced to deal with private money lenders charging usury rates of up to 35% interest. It’s little wonder that farmer suicide is a national epidemic when crops fail.

In India, middlemen dominate, each taking a cut and leaving the farmer with a pittance. Private industry is stepping in some districts to create grocery chains similar to those found in the West, contracting directly with farmers and building their own distribution networks. This eliminates many of the middlemen and raises the prices paid to farmers while at the same time lowering them for consumers. You might think the government would encourage this but it doesn’t. In fact, it restricts it and in some states, grocery chains are banned altogether because of fears about their impact on mom and pop stores and middlemen. These groups are politically connected, belong to the rising urban class and have the ear of politicians, whereas the farmer always comes second. The peasants’ plight is seen as something to be accepted, an unfortunate, eternal fact of nature.

The Indian farmer desperately needs efficient distribution networks, cold storage, warehouses and the many things that can be provided by private industry yet government attitudes continue to inhibit such investment in the agricultural sector to protect entrenched interests. It seems as if even the rural politicians don’t really want change because it might rock the boat and upset their power base.

When a farmer harvests his crop, he is unable to sell it to the highest bidder. Usually his only option is to sell to a small handful of licensed wholesalers who control the vegetable mandis (markets), a legacy of the “License Raj” I’ve written about before. Because they are scarce and give those who possess them control of the food markets through monopolistic practices, the licenses are valuable and awarded to those with political influence. It goes without saying that bribes are paid and those who benefit prefer the status quo. Calls for ending this system go nowhere but at least the latest “onion crisis” has begun to make the public aware of what’s going on.

The future of India points to a huge expansion of its cities, much like what we see now in China. This is where capital is flowing and political influence resides, yet most Indians still live in villages. As cities expand, land prices increase on their peripheries, farmland is diverted to other uses, and food production is pushed further away from nearby, city markets. Every day, thousands leave their village to build the glass towers of Gurgaon, Hyderabad or Bangalore and clean the homes of the those who live in them. Onion prices are pushed higher but even that could be a good thing if the money actually flowed into the hands of farmers, but it doesn’t. Farmers will continue to struggle and India will stumble from one food “crisis” to the next until something changes.

Do I believe such change will come? Actually, I do because the coming generation will demand it and forces are at play that will make it happen in spite of government. Here’s a short story. Our community in the countryside outside of Pune is not far from a good, two lane highway built within the last fifteen years to serve a privately funded, multi-billion project in the hills beyond. The local sarpanch tells stories of when he was a young man and how he would drive his bullock cart along the old road to take his crop to market. At each stream, he would unload his sacks of grain and carry them across the water to the other side where he would reload them onto his cart. In this manner, he reached Pune in five days whereas today, it takes only one hour by truck. All because of a road and transportation. Before, our area was poor but I wouldn’t call it that now. It has been fortunate. Farmers now grow a variety of crops and I’m even seeing flora-culture coming up here and there, made possible because of good roads, education and better technology. Kids all go to school whereas before only a few did. India’s integration into the modern world and the natural dynamism of its people are pushing these changes.

In the days of the Mughals, the policy of the empire was to extract as much wealth as possible from the peasants, leaving them just enough to survive to produce next year’s crop. The British followed much the same policy but realized it would be wiser, and better long-term business practice, to reinvest a little of the wealth into the country’s roads and railways, thereby increasing production and improving their ability to control a vast country. Since those days, India has come a long way but the farmer still gets the short end of the stick.

Gandhi foresaw a modern India that concentrated first upon improving the lot of its farmers and villages. As they prospered, he believed the entire country would rise. Nehru had an alternate vision of a modern India driven by industry, guided wisely by the government. He noted that all modern economies had passed through a phase of industrialization to escape poverty and felt Gandhi’s course to be impractical. Once India had assumed its rank among modern industrialized nations, it could turn its attention back to the land and help those left behind. Who was right? Nehru had a point but now that industrialization has come, I see rural India still waiting.