Onion crisis in India after tiny bulk reaches all-time high of 100 rupees ($1.62) per kilogram in some areas

News From the Onion in India

Politicians are humbled by a tiny bulb, and market forces.

Updated Nov. 6, 2013 6:36 p.m. ET

Ample monsoon rains helped most Indian crops this year, and one might think that’s good news for the governments of the five states holding assembly elections over the next two months. However, onions grow better in dry weather. And when the price of this staple food rises, as it has recently to an all-time high of 100 rupees ($1.62) per kilogram in some areas, Indian voters are known to toss the incumbents out. For example, an onion shortage helped the Congress Party take back the Delhi state government from the Bharatiya Janata Party in 1998. This year it could be the BJP’s turn to make Congress cry over their onions.Indian state governments take the blame for the hit to family food budgets because they set out to ensure stable prices that please both farmers and consumers. When they fail, as they often do, this only brings calls for more intervention. Instead the answer lies in allowing high prices to return supply and demand to equilibrium.

Indian state governments maintain a complex system of Agricultural Produce Marketing Committees that purchase commodities and sell them to other middle men. In the name of stabilizing prices, they prevent market signals from reaching those who plant the crops. In recent days onion growers in North Karnataka have blocked roads to protest the local APMC offering them only about half the market price. In such circumstances, farmers have little incentive to increase production.

On the consumer side, the state and central governments jointly run Fair Price Shops that sell produce to consumers holding ration cards at below market prices. The poor distribution channels for the shops lead to rotting food, and the cheap supply discourages substitution of other vegetables and conservation that would reduce demand.

Rather than allow prices to guide producers and consumers, Indian politicians have responded to the latest onion crisis with promises to punish hoarders. The newspapers are full of calls for the government to replicate the action of the hoarders, stockpiling supplies to release during shortages. Neither measure will have much effect.

Meanwhile, other government-created distortions exacerbate the problem. One reason for rising food prices is a new rural employment guarantee scheme that has diverted labor into make-work schemes. Higher wages without higher productivity in the countryside is a recipe for lower real wages in the cities.

A certain amount of volatility in food prices is inevitable due to weather conditions, but this is self-limiting as long as the market is allowed to work. When they promise to improve on the market, politicians set themselves up for failure. Perhaps this crisis will lead to a free-market epiphany, but we suspect India’s leaders will be peeling this onion for some time to come.