For India’s Inflation Crisis, See Onion Prices; The onion is the preferred gauge by which many Indians measure inflation and the competence of their politicians

For India’s Inflation Crisis, See Onion Prices

By Brendan Greeley and Kartik Goyal on July 25, 2013

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Apples are too expensive now, so Shilpa Gethe settles for bananas. She doesn’t have an easy substitute for onions. Gethe, 32, a housewife in the Mumbai suburb of Vashi, buys more than four pounds of onions a week. About two months ago a pound cost 10 rupees (17¢). Since then the price has doubled, she says. A 500-rupee note used to get her through a week of vegetables. Now it’s two days, sometimes less. To stick to her monthly budget, Gethe sends her husband to work with a packed lunch. “I have to put in more work,” she says.India’s perennial battle with inflation is enshrined in a humble staple: the onion. On July 15, the nation’s commerce ministry reported that the price of onions had shot up 114 percent since June 2012. Consumer price inflation rose 9.9 percent in the 12 months through June—the biggest jump among the BRIC nations. It was 6.7 percent in Brazil, 6.9 percent in Russia, and just 2.7 percent in China.

Rising prices for food—which makes up slightly more than half of the consumer index—are the main culprit. Other staples, tomatoes for instance, have also registered large price jumps. But it’s the onion that’s the national bellwether. The vegetable is a key ingredient in the Mughal cuisine of much of the country. Annual per-capita consumption stood at 18.1 lb. in 2009, a bit under the 20 lb. per year in the U.S., according to figures supplied by the National Onion Association, a Colorado-based trade group. India is the world’s No. 2 producer of the vegetable after China.

Onions have played an outsized role in Indian politics, too. The Congress Party won national elections in 1980 after turning the high price of onions into a campaign issue. In 1998, the rival Bharatiya Janata Party lost control of the capital, New Delhi, when a shortage of onions sent prices soaring. “Higher onion prices create a huge negative sentiment, especially for the poor, as they are a significant part of the consumption basket,” says N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy in New Delhi.

Inflation “is a regressive tax, and it hurts the poor the most,” said Duvvuri Subbarao, who heads the Reserve Bank of India, during a speech in London on July 17. Unfortunately for India’s poor, there’s little Subbarao can do to tame the price of onions—or any other foodstuff. Between 2010 and 2012, India’s central bank raised interest rates by almost four percentage points, and has lowered them only slightly since the beginning of this year.

There are several reasons food inflation in India has proven resistant to traditional macroeconomic fixes. As people become richer in India, they’re starting to consume fewer cereals, like wheat, and more vitamin- and protein-rich foods, like onions and chicken. That’s why prices for nongrains have been rising faster than those of grains for several years now. Yet even though demand for perishables is growing, there remains no way for the government to stockpile reserves for lean years, as it does with grains.

Indians’ tastes may be changing, but the way they grow their food is not. Small plots and outdated farming practices have kept onion production static for years. Yields average 14.2 metric tons per hectare, compared with 22 metric tons per hectare in China, according to India’s National Horticulture Board. Unable to afford irrigation systems, Indian peasants entrust their livelihoods to the monsoons. Too much rain, rather than too little, has been the problem in recent years. In 2010 output of onions in the top producing states of Maharashtra, Gujarat, and Karnataka dropped by 20 percent after two wet years, creating what economists came to call the onion crisis.

Infrastructure is another problem. India has proven adept, over the last two decades, at moving people to its cities. It’s not nearly as good at getting vegetables to urban markets. According to a 2011 paper by the Reserve Bank, about 40 percent of India’s fruit and vegetables rot before they’re sold.

While heavy rains are a factor in this year’s onion price spike, Ramdev, a vegetable vendor in Vashi who would only give his first name, suspects the many middlemen are taking advantage of the shortage by jacking up prices. “It’s beyond my understanding why onion prices have gone up so much,” he says. “This is something unusual.” Following in the footsteps of previous administrations, the government is considering a temporary ban on onion exports. That would be a quick fix—and much cheaper than having to improve roads, shorten supply chains, or build climate-controlled warehouses. For that, India’s housewives will have to wait.

The bottom line: The onion is the preferred gauge by which many Indians measure inflation and the competence of their politicians.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

One Response to For India’s Inflation Crisis, See Onion Prices; The onion is the preferred gauge by which many Indians measure inflation and the competence of their politicians

  1. For India’s Inflation Crisis, See Onion Prices; The onion is the preferred gauge by which many Indians measure inflation and the competence of their politicians | Bamboo Innovator

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