Explainer

Is Bangladesh’s Per Capita Income “Really” Greater Than That of India?

For a story to go viral on the social media, it needs to be simple and straightforward. In fact, the story should be summarisable in a headline.

The story of Bangladesh’s per capita income overtaking that of India is precisely that kind of story. John Lanchester defines per capita income in his book How To Speak Money as: “The total Gross Domestic Product(GDP) of a country divided by the number of people in the country…It is a measure of how rich the country’s citizens are on average.”

In simple terms what this story told us is that the average income of Bangladesh was more than that of India and hence, an average Bangladeshi was richer than an average Indian (Actually, it may not be so. You can understand why I say so here. But that’s what the conclusion drawn was).

No wonder the story got picked up and no wonder it has become viral.

Dear reader, you might be wondering by now if the story is that simple why am I writing about it? The answer will soon become clear.

Let’s first take a look at the following chart. It plots the per capita income of India and Bangladesh.

Bangladesh overtakes India?


Source: International Monetary Fund.

A few days back, the International Monetary Fund published the World Economic Outlook (WEO) for October 2020. It also released a lot of data along with it. The above chart is plotted using data from the database which accompanied the release of the WEO.

As per the above chart, India’s per capita income in 2020 will be $ 1,876.53. In comparison, the per capita income of Bangladesh during 2020 will be $1,887.97. This is around 0.6% more than the Indian per capita income. The difference is very small but there is a difference.

All the song and dance about India versus Bangladesh came from this data point. Everyone picked up this data point, the media, the economists, the analysts, the influencers and finally, the politicians as well.

But what no one bothered to elaborate on is that the WEO data also tells us that India’s per capita income will be higher than Bangladesh between 2021 and 2023, and in 2024,  Bangladesh will overtake India again.

The point is that there is a lot of nuance in this data, which the headline of Bangladesh per capita income overtaking India’s, doesn’t really summarise. But who was bothered. It made for a great story and people ran with it. As the old newspaper cliché goes, if it bleeds, it leads.

Nevertheless, there is one thing that I haven’t told you up until now. What is that? The per capita income in the above chart and what we have been discussing until now, is in nominal terms (or current prices). This basically means that it hasn’t been adjusted for inflation. The inflation in Bangladesh since 2014 has been higher than India. The following chart plots that.

Faster price rise in Bangladesh

Source: International Monetary Fund.

A higher inflation reduces the purchasing power of a currency and that needs to be adjusted for. The International Monetary Fund provides data after adjusting for inflation and purchasing power parity (that is how much does a currency really buy), as well.

Take a look at the following chart, it plots the per capita income of India and Bangladesh, adjusted for inflation, in constant terms.

India is ahead of Bangladesh

Source: International Monetary Fund. Purchasing power parity; 2017 international dollar.

Once we adjust for inflation and purchasing power, the Indian per capita income is higher than that of Bangladesh. The trouble is that by now this story has become too complicated to go viral.

It’s no longer as simple as Bangladesh’s per capita income overtaking India. And India’s per capita income continuing to be higher than that of Bangladesh is not much of a story. I mean after all we are competing with China and not with a puny Bangladesh. (I am saying all this to explain why a certain kind of story in economics tends to go viral on the social media. We all want simple binary explanations that do not tax our minds much).

The story doesn’t end here. There is more to come. While Bangladesh’s per capita income continues to be lower than that of India, it is rapidly catching up. Let’s take a look at the following chart. It plots the ratio of the Indian per capita income to the Bangladeshi per capita income, using data used in the previous chart which has been adjusted for inflation and purchasing power parity.

Bangladesh is catching up


Source: Author calculations on IMF data.

As per this chart, India’s per capita income was 43% more than that of Bangladesh in 2016. The difference has been falling ever since. In 2021, the difference will fall to 20%. This basically means that Bangladesh is rapidly catching up on India.

Bangladesh has been doing better than India on a whole host of non-income indicators.

1) As per the Human Development Index, India’s life expectancy at birth in 2018 was 69.4 years. That of Bangladesh was 72.3.

2) This is primarily because India has a higher mortality rate of children under 5 years. In the Indian case, the mortality rate is 39.4 per 1,000 live births. In Bangladesh it is at 32.4. This means that fewer children die in Bangladesh before achieving the age of five. This explains why average life expectancy in Bangladesh is higher.

3) The child malnutrition rate in Bangladesh (% of children under 5) in Bangladesh is 36.2%. In India it is at 37.9%. A greater proportion of Indian children under the age of 5 are malnourished. Of course, the absolute numbers are much much more in the Indian case.

4) Bangladesh has much higher immunisation rates for diseases like DPT and measles than India. The rate of malaria incidence is higher in India, with 7.7 per 1,000 people being at risk. In case of Bangladesh, 1.9 per 1,000 people are at risk. The rate of tuberculosis incidence is higher in Bangladesh.

5) Interestingly, the current health expenditure in case of Bangladesh is at 2.4% of its GDP. India spends 3.7% of its GDP. But clearly the money is being much better spent in Bangladesh.

6) Bangladesh also does a lot better on a whole host of work and employment indicators. The employment to population ratio in case of Bangladesh is 56.2%. In case of India it is 50.6%. Clearly a greater proportion of Bangladeshi population is employed.

7) This is reflected in the higher labour force participation rate (people of the age of 15 and above it, who are a part of the labour force) of 58.7% in case of Bangladesh. In case of India it is at 51.9%. More interestingly, the labour force participation rate in case of Bangladeshi women is at a much higher 36% against 23.6% in India.

8) 55.5% of the employment in Bangladesh can be categorised as vulnerable employment. In case of India it is at 76.7%. A higher proportion of Indian jobs are at the risk of being lost.

9) 33.4% of the statutory age pension population in Bangladesh gets pension. In India, it is at 25.2%. On the flip side, a higher proportion of non-agricultural employment in Bangladesh is informal (at 91.3% against India’s 74.8%).

10)  43.9% of India’s labour force is employed in agriculture against Bangladesh’s 40.2%. Clearly, Bangladesh has been able to move people away from agriculture into other ways of earning money faster than India. 39.4% of the country’s employment is in the services sector against India’s 31.5%.

11) The sex ratio in Bangladesh (male to female ratio) at 1.05 is better than India’s 1.10. In India there are 100 females per 110 males on an average. In Bangladesh there are 100 females per 105 males on an average.

12) 97.3% of the population in Bangladesh has mobile phone subscriptions. In India it is at 86.9%. Having said that, India’s internet penetration at 34.5% of the population is higher than Bangladesh’s 15%.

13) The Gini coefficient, a measure of income inequality within a country, is lower in case of Bangladesh at 32.4 against India’s 35.7.

14) When it comes to schooling, the expected years of schooling in India stands at 12.3 years. In case of Bangladesh it is slightly lower at 11.2 years. Having said that, the rate of literacy among adults (15 years and older) in Bangladesh is at 72.9% against India’s 69.3%. This, despite the fact that the government expenditure on education in India amounts to 3.8% of the GDP, against Bangladesh’s 1.5% of the GDP. One possible explanation for this lies in the fact that India spends much more on higher education than Bangladesh.

15) The mean years of schooling for females in Bangladesh is at 5.3 years against India’s 4.7 years. On the flip side, the primary school dropout rate in Bangladesh is much higher at 33.8% against 12.3% in India’s case.

16) All the above data has been taken from the Human Development Index. With a score of 0.647 India ranks 129th on the index. Bangladesh on the other hand has a score of 0.614 and ranks 135th on the index. But there is a simple explanation for this. As Swati Narayan wrote in The Indian Express, in February this year: “While, technically, on the Human Development Index, Bangladesh scores marginally less, this is largely because the index merges income and non-income parameters.”

On many non-income indicators (as we have seen above) Bangladesh comes out better than India. Take the case of the Global Hunger Index. India ranked 94th among 107 countries. Bangladesh was at the 88th spot. Both countries have a level of hunger that is serious. But in case of Bangladesh, the situation is a little better. Even the World Happiness Report reported Bangladesh to be a much happier country than India.

17) India’s exports are much more than that of Bangladesh. But when it comes to exporting readymade garments (something that can create a huge number of jobs), Bangladesh has been doing much better than India for a while now. Take a look at the following chart, which compares India and Bangladesh’s garment exports.

Bangladesh beats India

Source: Bangladesh Garment Manufacturers and Exporters Association, Centre for Monitoring Indian Economy and the Dhaka Tribune.

The reasons for this success are explained in this piece I wrote for Mint.

Not for a moment am I suggesting that India is doing worse than Bangladesh on all parameters. It is not. But over the last two decades Bangladesh has managed to narrow the gap on many parameters especially those on the social, health, gender and work front.

If this continues, in the years to come it won’t be difficult for Bangladesh to overtake India’s per capita income, especially if we continue with what has now become the all-encompassing nothing is wrong and all is well rhetoric.

Of course, meanwhile both sides will continue to spin data in ways that are useful to them. The chances that you will see spin with data are more these days than the chance of a ball spinning on a cricket pitch.

Auto Sector Recovery is Not Real. It’s a Mirage Created by Inventory Pileup

All is well, when it comes to two-wheeler and passenger-vehicle sales. Or so we have been told over the last few days.

The small industry which has developed over the last few months, and whose main job is to shout recovery recovery at a drop of a hat, is at it again.

But should we believe them? Or rather how much should we believe them?

As per Autocar domestic sales of passenger vehicles (of India’s major car companies) in September 2020, went up by around 35% to a little over 2.75 lakh units. The September 2019 sales had been at a little over 2.04 lakh units.

In fact, August 2020 sales of the same set of companies had been at around 2.01 lakh. When we take that into account, the recovery has been very good.

As per Rushlane, the domestic sales of India’s major two-wheeler companies in September 2020 stood at 17.81 lakh, up 11.6% from September 2019, when sales had stood at 15.95 lakh.

Varied reasons have been offered for this recovery. Let’s take a look at these reasons pointwise.

1)  The pent-up demand is leading to higher sales (How do you argue against something like that?)

2) The economy is getting back on track. (Well!)

3) People do not want to use public transport due to the fear of the covid-pandemic and hence, are buying two-wheelers and cars. (Common sense and how do you argue against something like that).

4) Very low interest rates offered by banks on car loans. Take a look at the following chart.

Low interest rates

Source: ICICI Securities.

Car loan interest rates are as low as 6.5%. This has also helped push up sales. Along with low interest rates, many banks are offering very high loan to value, when it comes to entry-level cars. This means if the price of the car is Rs 5 lakh, some banks are willing to offer 95-100% of this price as a loan.

Also, as a research note authored by ICICI Securities analysts, Kunal Shah, Renish Bhuva and Chintan Shah points out, banks are offering, “cost-optimised financing schemes (tenure up to 7-8 years, step-up EMI, balloon EMI, low down payment options, scheme for low EMI for three months, etc).”

So, not only can customers borrow easily, they can do so in many different ways.  They have better choice and all this is encouraging them to borrow (But are they borrowing is the real question?).

5) Also, the agriculture sector continues to do well, and this has meant increased purchasing power in rural India, which has led to an increase in the purchase of two-wheelers. (This is a story as old as the ages, when urban India doesn’t do well, rural India has to).

These are the reasons that have been offered for India’s automobile sector doing well. Now let’s take a look at whether a recovery has really happened.

1) What automobile companies refer to as domestic sales are essentially dispatches to dealers or factory gate shipments. These are units leaving the manufacturing facility for sales to consumers. They haven’t been sold as such. Generally, company dispatches are a reasonable indication of end consumer sale. But this time companies are building up inventory at the dealer levels in the hope of sales picking up during the so-called festival season. The building up of inventory has been necessitated by the new BS VI environmental norms, which has led to the requirement of building new inventory.

This does not mean that the whole dispatch ends up as dealer inventory but a substantial portion does.

2) Hence, a better way of looking at data is to look at the number of registrations. This data is released by the Federation of Automobile Dealers Association (FADA). As per this data, in August 2020, 1.79 lakh passenger vehicles were registered. This is around 25,000 units lower than the dispatches of 2.04 lakh units carried out by major car companies during August.

When it comes to two-wheelers, the gap is bigger. In August 2020, as per FADA nearly 8.99 lakh two-wheelers were registered. In comparison 14.94 lakh two-wheelers from major companies had been dispatched.  There is a gap of close to six lakh units, which has ended up as inventory.

Take a look at the following table, which gives registration numbers of different kinds of vehicles.

Who is really buying?

2W = Two wheelers. 3W = Three wheelers. CV = Commercial vehicles. PV = Passenger Vehicles (Cars). TRAC = Tractors.

The sales and registration of commercial vehicles remains down in the dumps. This is hardly surprising given that the investment in the economy has totally collapsed. As per the Centre for Monitoring Indian Economy, the value of total new investments announced during July to September 2020, stood at Rs 58,601 crore, the lowest in fifteen years (without adjusting for inflation).

In fact, tractors are the only vehicles which have shown an increase in registration. This is due to the agriculture sector doing well and the rural rich doing well.

As per the VAHAN data released by the government, the total number of motor cars (as they call it) registered in August stood at 1.75 lakh . As per this data around 8.81 lakh two-wheelers were registered in August 2020, telling us the same story. Clearly, a significant portion of dispatches until August were for building inventory.

(Vahan data covers 1,242 out of 1,450 RTOs in the country. Hence, there is bound to be some discrepancy between company dispatches and registration numbers. But six lakh units, which is the difference in August in case of two-wheelers, is too huge to be just explained by this. FADA also refers to the Vahan database)

We do not have the September data for registrations as yet. But what we know clearly is that dealers have a lot of inventory piled up in the months up to August. And there is no reason for this to have stopped in September as well.

3) In fact, there is another factor that needs to be taken into account and that is the base effect. Two-wheeler and passenger vehicle registrations were already slow around this time last year. Hence, it makes sense to compare the 2020 numbers with the registrations that happened around this time in 2018. The registrations of motorcars as per Vahan data in August 2018 stood at around 1.96 lakh (compared to 1.75 lakh in August 2020). When it comes to two-wheeler registrations they stood at 12.12 lakh (compared to 8.81 lakh in August 2020). Hence, in that sense we are two-years behind when it comes to real consumer sales.

4) Let’s take a look at bank loans on this front. This is where things get very interesting. More than three-fourth of cars and two-wheelers were bought on loans before the covid-pandemic struck. The RBI does not give a proper division of different kinds of ‘vehicle loans’. But I guess even an overall number can be used to draw some inferences. The overall vehicle loans given by banks between end of March and August have contracted a little. This means that on the whole, people have been repaying loans and net-net banks haven’t given any fresh vehicle loans. While net-net between end March and end August there has been no fresh lending of vehicle loans by banks, some lending has happened in July and August. This stands at Rs 5,167 crore.

The question is if banks aren’t giving out vehicle loans how are all these vehicles being bought? Of course, banks aren’t the only financiers of vehicle loans, the non-banking finance companies (NBFCs) also finance the buying of vehicles.

Are NBFCs filling up this space? The NBFCs are also dependent on banks for financing. This means that NBFCs borrow from banks and then lend that money out.  The overall bank lending to NBFCs has contracted by 1.3% or Rs 10,620 crore, between end March and end August.

Hence, the ability of NBFCs to continue financing vehicles, when their borrowing from banks has come down, is rather limited.
This does not mean that banks are not interested in financing any kind of vehicle. They seem to be interested in financing cars but not two-wheelers. What this means is that if “genuine sales” don’t pick up, the huge inventories that the two-wheeler dealers have built up will become a problem for them. Car dealers will face the same problem though not of the same proportion.

5) Also, as far as financing goes, while banks are looking to finance a higher loan to value for entry level cars, that doesn’t seem to the case for cars as a whole. As Vinkesh Gulati, the president of FADA told Bloomberg Quint: “It has come to down to 65%-70%.”

6) Finally, what is surprising is that September also had the 16-day Shraad period from September 1 and September 17, when people believe it’s inauspicious to make purchases. In this scenario, it becomes even more difficult to believe that passengers vehicle sales (car sales) went up by as much as 35% during the month. It’s looking more and more like an inventory pile up at dealer level than genuine sales.

As Gulati had told Moneycontrol.com in mid-September: “This year all festivities will begin a month after Shraadh gets over and this period is also not considered to be good for sales in the North, East and West of the country. We are expecting September to be below August and also below last September.”

To conclude, as the economy opens up, automobile sales are bound to improve gradually. Nevertheless, there are several nuances that need to be kept in mind, before announcing an auto sector recovery. The auto-sector in India forms around half of the manufacturing sector and hence, is very important. And given that, it is important to analyse it carefully.

From the looks of it, the difference between genuine registrations at the retail level and the company dispatches, will only go up in September as the inventory pile up continues.

In fact, this inventory build-up might also be responsible to some extent for the increase in goods and services tax collections seen during September. The trouble is that the end consumer is yet to pay this tax.

 

Why Indians Pay Such a High Price for Petrol and Diesel

At the end of every month, the Controller General of Accounts (CGA) declares the revenue and the expenses of the central government up until the last month. Hence, on September 30, the CGA declared the revenue and the expenses of the central government between April 1 and August 31.

Take a look at the following chart. It plots the decrease in gross tax revenue between April and August 2020 in comparison to the same period in 2019. The major taxes collected by the central government are income tax that you and I pay, corporate tax (income tax paid by corporates), customs duties, central goods and services tax, goods and services tax compensation cess and excise duties.

They all fall down


Source: Centre for Monitoring Indian Economy.

As can be seen in the above chart, the collections of all taxes have come down. The gross tax revenue is down 23.7% to Rs 5.04 lakh crore. Only one tax and that is excise duty, has grown during the course of this year. The growth is a huge 32.05% to Rs 1 lakh crore.

Given the economic contraction this year, it is hardly surprising that tax collections have crashed. The question is how has the collection of excise duties increased by almost a third?

This is primarily because of the central government increasing the excise duty it charges on petrol and diesel. This has been done twice in 2020. First in March and then again in May.

The excise duty on petrol stood at Rs 19.98 per litre, when it was increased by Rs 3 per litre in March and then again by Rs 10 per litre in May and now stands at Rs 32.98 per litre. When it comes to diesel, the excise duty on it stood at Rs 15.83 per litre in March. It was increased by Rs 3 per litre in March and Rs 13 per litre in May.

Take a look at the following table. It provides the price build up of petrol in Delhi as of March 1 and as of October 1.

High and low.

Source: Indian Oil Corporation.

This table makes for a very interesting reading. Let’s first understand how the mathematics of this works out using the data as of October 1.

The price charged to dealers is Rs 25.68 per litre. On this, the central government charges an excise duty of Rs 32.98 per litre. There is a dealer commission of Rs 3.69 per litre. Adding the price charged to dealers (Rs 25.98), the excise duty (Rs 32.98) and the dealer commission (Rs 3.69), we get a price of Rs 62.35 per litre. On this the local Delhi government charges a value added tax of 30%. This works out to Rs 18.71 per litre in this case.

Adding the value added tax, we get the retail selling price of Rs 81.06 per litre. The maths for the price as of March 1, works similarly, the difference being in the numbers and the taxes.

In March, the price of Indian basket of crude oil was around $55 per barrel. The latest price of the Indian basket of crude oil is around $41 per barrel. This is reflected in the fact that the price charged to dealers as of October 1, stood at Rs 25.68 per litre, lower than the Rs 32.93 per litre charged in March.

Despite the higher price charged to dealers, the retail selling price of petrol in March was at Rs 71.71 per litre as against Rs 81.06 per litre in October. The price as of today is 13% higher than that in March.

What’s happening here? Let’s take a look at it pointwise.

1)  The total excise duty on petrol was at Rs 19.98 per litre in March. It has since gone up to Rs 32.98 per litre, Rs 13 per litre extra. This adds to the retail price.

2) The value added tax charged by the Delhi government has also increased from 27% to 30%. This also adds to the retail price though not as much as the increase in excise duties.

3) As of March 1, taxes amounted to Rs 35.23 per litre (excise duties + value added tax). This was against a price charged to dealers of Rs 32.93 per litre. Taxes amounted to 107% of the price charged to dealers.

As of October 1, taxes amount to Rs 51.69 per litre (excise duties + value added tax). This is against a price charged to dealers of Rs 25.68 per litre. Taxes now amount to 201% of the priced charged to dealers. This explains the higher retail price of petrol, despite the lower price charged to dealers, thanks to a lower oil price.

4) There is another way of looking at this data. In March, the total taxes amounted to around 49% of the retail price. In October, they amount to around 64% of the retail price. There has been a substantial increase in taxes.

5) The reason behind this increase is that the central government needs to meet its expenditure from somewhere. One point that often gets made on the social media is that the central government shares the increase in excise duties with the state governments. This isn’t totally true.

In May, the excise duty on petrol was hiked by Rs 10 per litre. Of this hike, the hike in road and infrastructure cess (additional excise duty) was Rs 8 per litre. Given that this is a cess, it need not be shared with the state governments. Hence, the bulk of the increase has stayed with the central government.

Now let’s take a look at diesel pointwise. In this case, I am taking diesel price in Delhi as of February 12. I couldn’t find the data for March 1. But the logic remains entirely the same.

1) The price of diesel as of February 12 was Rs 64.87 per litre. As of October 1, it stands at Rs 70.53 per litre. This despite lower oil prices.

2) The total excise duty on diesel back then was Rs 15.83 per litre. Currently, it stands at Rs 31.83 per litre. This has added to the price of diesel.

3) As of February 1, the price charged to dealers was Rs 36.98. The excise duty was Rs 15.83 per litre. The value added tax worked out to Rs 9.56 per litre. Hence, total taxes (excise duty + value added tax) worked out to Rs 25.39 per litre or around 69% of the price charged to dealers.

As of October 1, the excise duty is at Rs 31.83 per litre whereas the value added tax works out to Rs 10.37 per litre. Hence, total taxes work out to Rs 42.2 per litre or 164% of the price charged to dealers.

4) Total taxes amounted to 39% of the retail price in February. They now work out to 60%.

5) In May, the excise duty on diesel was hiked by Rs 13 per litre.  Of this hike, the hike in road and infrastructure cess (additional excise duty) was Rs 8 per litre. Given that this is a cess, it need not be shared with state governments. Hence, the bulk of the increase has stayed with the central government.

This explains why you and I are paying a higher amount per litre of petrol and diesel, despite oil prices being lower from the time the covid-pandemic struck. Also, it needs to be mentioned here that the consumption of petroleum products has fallen every month between April and August. The following chart plots the same.

The Great Fall

Source: http://164.100.24.220/loksabhaquestions/annex/174/AU1274.pdf

The interesting thing here is that thanks to a higher excise duty per litre of petrol and diesel, the collection of excise duties has risen, despite fall in consumption. Also, the other interesting bit here is that the consumption decline was at 8.4% in June. The situation has worsened since then.

In the last six years, the government hasn’t passed on the fall in the price of oil to the end consumer. In May 2014, when Narendra Modi took over as prime minister, the average price of  the Indian basket of crude oil during the month was $106.85 per barrel. The following chart plots the average price of the Indian basket of crude oil during a particular year, over the years.

Oil not on boil

Source: Petroleum Planning and Analysis Cell. (https://www.ppac.gov.in/content/149_1_PricesPetroleum.aspx).  *Between April and August 2020.

The above chart makes for a very interesting reading. The average price of the Indian basket of crude oil in 2020-21 at $35.74 per barrel, has been the lowest since 2003-04. But that is clearly not reflected in the retail price of petrol and diesel, thanks to higher taxes, particularly higher excise duties.

A May 2020 report by the Press Trust of India points out: “The tax on petrol was Rs 9.48 per litre when the Modi government took office in 2014 and that on diesel was Rs 3.56 a litre.” The Modi government has captured a bulk of the fall in price of oil over the years. This is clearly reflected in the following chart, which plots the excise duty earned by the government from petroleum products.

Up, up and away. 

Source: Petroleum Planning and Analysis Cell. (https://www.ppac.gov.in/content/149_1_PricesPetroleum.aspx). *Between April and June 2020.

As can be seen from the above chart, the excise duty earned from petrol and diesel has more than doubled over the years. While, the government has captured a bulk of the fall in oil prices, there are no guarantees that it will protect the consumer, if and when oil prices start to go up again.

Also, this is a very easy way for the government to collect revenue. It allows them to go slow on more difficult ways, like selling stakes in public sector enterprises (PSEs), selling the massive land owned by PSEs, shutting down the badly run PSEs, fixing the badly implemented goods and services tax system, and so on.

Take a look at the following chart which compares India’s petrol and diesel prices with that of our neighbouring countries.

The Indian high


Source: Websites of oil companies in these different countries. Nepal prices from local newspapers.
(I would like to thank Chintan Patel for putting this table together).
Prices as of October 1, 2020.

The above chart clearly shows that the petrol and diesel prices are the highest in India. And as they say, there is no free lunch in economics. You and I are paying this higher price, not just when we buy petrol and diesel directly, but also when we pay for almost every product that is produced somewhere and delivered to where we are.

Has RBI Lost Control of Monetary Policy?

On August 31, 2020, the Reserve Bank of India (RBI), published an innocuously titled press release RBI Announces Measures to Foster Orderly Market Conditions. The third paragraph and the fourth line of the release said this: “The recent appreciation of the rupee is working towards containing imported inflationary pressures [emphasis added].”

What did this line mean? Take a look at the following chart. As of June 18, one dollar was worth Rs 76.55. By August 31, one dollar was worth Rs 73.13. The rupee had gained value or appreciated against the dollar.


Rupee Up, Dollar Down

 
Source: Yahoo Finance.

What has this got to do with inflation? When the value of the rupee appreciates against the dollar, the imports become cheaper.

Let’s say the price of a product being imported into India is $10. If the dollar is worth Rs 76, it costs Rs 760. If the dollar is worth Rs 73, it costs Rs 730. Hence, if the rupee appreciates, imports become cheaper and in the process the inflation (or the rate of price rise) that we import from abroad, comes down as well.

The trouble is that if imports become cheaper, things become difficult for the home-grown products. Hence, an appreciating rupee goes against the government’s pet idea of atmanirbhartha or producing goods locally.

Given that the current dispensation at the RBI is more or less in line with what the government wants, this move to allow the rupee to appreciate, so that it reduces imported inflation, is even more surprising. (On a different note, I am all for consumers getting to buy things cheaper than in the past. The point of all economic activity, at the end of the day, is consumption. But most people don’t think like that).

Also, RBI’s Monetary Policy Report released in April, suggests that the impact of the appreciation of rupee on inflation is at best marginal: “An appreciation of the Indian Rupee by 5 per cent could moderate inflation by around 20 basis points.” One basis point is one hundredth of a percentage.

The trilemma

So what’s happening here? The RBI has basically hit the trilemma, something which it can’t admit to. Trilemma is a concept which was originally expounded by the Canadian economist Robert Mundell. Basically, a central bank cannot have free international movement of capital, a fixed exchange rate and an independent monetary policy, all at the same time. It can only choose two out of these three objectives. Monetary policy refers to the process of setting of interest rates in an economy, carried out by the central bank of the country.

Of course, this is economic theory and in practice things are slightly different. The more a central bank allows free international movement of capital (i.e. money) and has a tendency to continuously intervene in the foreign exchange market and not allow free movement in the price of the local currency against the dollar, the lesser control it has over its monetary policy.

Let’s try and understand this through an example. Let’s consider the central bank of a country which allows for a reasonable movement of capital. At the same time, it wants to ensure that the value of its currency against the US dollar doesn’t move much.

This is to ensure that its exporters don’t face much volatility on the exchange rate front. Over and above this, the central bank does not want its currency to appreciate because that would hurt the exporters and make them less competitive.

In this scenario, let’s say the central bank sets interest rates at a higher rate than the rates in the United States and other parts of the world. What will happen is given that reasonably free movement of capital is allowed money from other parts of the world will come flooding in to cash in on the higher interest.

When the foreign capital comes into the country in the form of dollars and other currencies, it will have to be converted into the local currency. This will lead to the demand of the local currency going up and the local currency will appreciate against the dollar. Of course, when this happens, the value of the local currency will no longer remain fixed against the US dollar.

This is where the trilemma comes to the fore. If the country wants monetary independence and free movement of capital, it cannot have a fixed exchange rate. If it wants a fixed exchange rate then it has to set interest rates around the interest rate set by the Federal Reserve, so that it doesn’t attract capital because of a higher interest rate. In the process, it loses control of monetary policy.

In the Indian case, in the recent past, the RBI has tried to pursue all the three objectives, reasonably free movement of capital, a currency (the rupee) which doesn’t appreciate against the dollar and an independent monetary policy.

The repo rate, or the rate at which the RBI lends to banks, was cut from 5.15% to 4%, in the aftermath of the covid-pandemic. The RBI has also flooded the financial system with money by buying government bonds.

Between February 24 and April 23, the RBI lent a lot of money to banks through long-term repo operations, targeted long-term repo operations and targeted long-term repo operations 2.0. These schemes have essentially lent money to banks at the repo rate for the long term. On February 24, the RBI lent Rs 25,021 crore to banks for a period of 365 days at the prevailing repo rate of 5.15%. The repo rate is the interest at which RBI lends to banks, typically for the short-term.

After this, the RBI has lent around Rs 2.13 lakh crore for a period of around three years at the prevailing repo rate. Around Rs 1 lakh crore out of this was lent at 5.15%. In late March, the RBI cut the repo rate by 75 basis points to 4.4%. The remaining Rs 1.13 lakh crore has been lent at this rate. The idea here was to encourage to lend money to banks at a low interest rate and then encourage them to lend further, under certain conditions. There has been more bond buying over and above this.

The idea was to drive down interest rates to lower levels, so that companies borrow and expand, people borrow and consume. In the process, the economy starts to recover. Also, with the government borrowing more this year, lower interest rates would help it as well.

Along with this, the reasonably free movement of capital that India allows has continued. The RBI has also intervened in the currency markets trying to ensure that the rupee doesn’t appreciate against the dollar.

What’s happening here? In the aftermath of covid, Western central banks have gone on a money printing spree, some to drive down interest rates and to get businesses to expand and people to consume, and some others to finance the expenditure of their government. Take the case of the Federal Reserve of the United States. Between February end and early June, it printed a close to $3 trillion and expanded its balance sheet by three-fourths in the process.

To cut a long story short, interest rates have been driven down globally and there is a lot of money going around looking for some extra return. Some of this money has been coming to the Indian stock market.

In 2020-21, the current financial year, the foreign institutional investors (FIIs) have net invested $7.62 billion in the Indian stock and bond market. A good amount of this, $6.66 billion, came in August, when FII investment turned into a deluge. Of course, there were months like April and May, when the FIIs net sold. Between June and August, the FIIs net invested $10.54 billion in the Indian stock and bond markets.

The foreign direct investment (FDI) coming into India between April and July stood at $5.86 billion, with $4.01 billion coming just in July. The outward FDI (Indians investing abroad) in the first four months, stood at $3.17 billion. This means that the net FDI number (foreign investments made by Indians deducted from investments in India by foreigners) has been in positive territory. Net-net dollars have come into India on the FDI front.

Over and above this, the net receipts from services (i.e. services exports minus services imports) stood at around $28 billion between April and July.

Other than this, the demand for dollars, from within India, has come down. The import of crude oil and petroleum products between April and August 2020 has fallen by 53.7% to $26.02 billion. This has been both on account of fall in price of oil as well as lower consumption. In fact, on the whole, the goods exports have fallen at a lesser pace than goods imports, again implying a reduced demand for dollars within India.

Internal remittances, the money sent by Indians working abroad back to India, must have definitely fallen this year (I say must because the data for this isn’t currently available). Nevertheless, at the same time, outward remittances, everything from money spent on health, education and travel, has also come down, given that barely anyone is travelling abroad.

What does this basically mean? It means more dollars are coming into India than leaving India. When dollars come into India they need to be converted into rupees. This increases the demand for rupees and the rupee then appreciates against the dollar. This, as I have explained above, hurts atmanirbharta, domestic producers of goods and exporters, all at once.

Preventing the appreciation of the rupee

To prevent the rupee from appreciating against the dollar, the RBI buys dollars by selling rupees. In fact, that is precisely what the RBI has done between April and July this year. It has net purchased $29 billion, the highest in this period in the last five years. The August press release suggests that the RBI stopped trying to defend the rupee from appreciating sometime during the month or at least didn’t try as hard as it did in the past.

If we look at the foreign currency assets of the RBI they have barely moved between August 28 (three days before the press release) and September 18 (the latest data available), barely increasing from $498.36 billion to $501.46 billion. This tells us that the RBI isn’t really intervening much in the foreign exchange market in the recent past. But that might also be because of the fact that in September (up to September 29), the FIIs have net sold stocks and bonds worth just $4 million. Net net, FIIs didn’t bring any dollars into India in September.

By buying dollars, the RBI releases rupees into the Indian financial system and thus increases the money supply. In the normal scheme of things, the RBI can sterilise this by selling bonds and sucking out this money. But that would have gone against the easy money policy that the Indian central bank has been running through this financial year.

The excess liquidity (or the money that the banks deposit with the RBI) in the financial system suggests that the RBI hasn’t really been sterilising the rupees it has put into the system to prevent the appreciation of the rupee. On the whole, the bond buying by the RBI in order to release money into the financial system, has been in the positive territory. The following chart plots this excess liquidity in the system.

Easy Money


Source: Centre for Monitoring Indian Economy.

 

The excess liquidity in the system, money which banks had no use for and parked with the RBI, even crossed Rs 6 lakh crore in early May. It has since fallen but is still at a very high Rs 2.72 lakh crore.

So, what does all this mean?

The inflation between April and August, as measured by the consumer price index, has been at 6.63%. The inflation in August was at 6.69%. As per the RBI’s agreement with the government the inflation should be 4% within a band of +/- 2%.

This means that the current inflation is way beyond range. A major reason for this is high food inflation which between April and August has been at 9.58%. The food inflation in August was at 9.05%.

If we look at the core inflation (which leaves out food, fuel and light), it is at 5.16%. If we add fuel inflation to this (thanks to the government increasing the excise duty on petrol and diesel), the inflation is higher.

Where does this leave the RBI? All the liquidity in the financial system hasn’t led to even higher inflation primarily because there has been an economic collapse and people are not spending money as fast as they were in the past.

Food inflation has primarily been on account of supply chains breaking down thanks to the spread of the covid-pandemic. The trouble is that covid is now spreading across rural India. As Crisil Research put it in a recent report: “Of all the districts with 1,000+ cases, almost half were rural as on August 31, up from 20% in June.” This basically means that the supply chain issues when it comes to movement of food are likely to stay, during the second half of the year as well.

Food on its own makes up for 39.06% of the overall index and 47.25% of the index in rural India. As the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework (better known as the Urjit Patel Committee) said:

“High inflation in food and energy items is generally reflected in elevated inflation expectations. With a lag, this gets manifested in the inflation of other items, particularly services. Shocks to food inflation and fuel inflation also have a much larger and more persistent impact on inflation expectations than shocks to non-food non-fuel inflation.”

An IMF Working Paper titled Food Inflation in India: The Role for Monetary Policy suggests the same thing: “Food inflation [feeds] quickly into wages and core inflation.” This is something that the country saw in the five-year period before 2014, when food inflation seeped into overall inflation.

What this means is that if covid continues to spread through rural India and food supply chains continue to remain broken, food inflation will persist and this will seep through into overall inflation, which is anyway on the high side.

In this situation what will the RBI do in the months to come? As mentioned earlier, all the money that the RBI has pumped into the Indian financial system hasn’t led to an even higher inflation simply because the consumer demand has collapsed. But as the economy continues to open up and the demand picks up, there is bound to be some amount of excess money chasing the same amount of goods and services, leading to higher inflation.

In this scenario what will the RBI do to prevent the appreciation of the rupee against the dollar, especially if foreign capital continues to come to India and the demand for the rupee continues to remain high?

As mentioned earlier, if the RBI buys dollars and sells rupees to prevent appreciation, it will continue to add to money supply. Interestingly, the money supply (as measured by M3 or broad money) has been growing at a pace greater than 12% (year on year) since June. This kind of rise in money supply was previously seen only before 2014, a high inflation era.

If RBI keeps trying to intervene in the foreign exchange market to prevent the appreciation of the rupee against the dollar, it will keep adding to the money supply and that creates the risk of even higher inflation. To counter this risk of higher inflation, the RBI will need to raise the repo rate or the interest rate at which it lends to banks.

This goes against what the Indian economy or for that matter any economy, needs, when it is going through an economic contraction. This in a way suggests that the RBI has lost control over the monetary policy. In fact, even if the monetary policy committee (MPC) of the RBI, whenever it meets next, keeps the repo rate constant, it suggests a lack of control over monetary policy. This also explains why the RBI hasn’t made any inflation projections since February this year.

Of course, the RBI has the option of sterilising the extra rupees it releases into the financial system by buying dollars coming into India. In order to sterilise the extra rupees being released into the financial system, the RBI needs to sell government bonds. The RBI needs to pay a certain rate of interest on these bonds. These bonds are a liability for the RBI.

As far as assets of the RBI go, a significant portion is invested in bonds issued by the American and other Western governments and the International Monetary Fund. These assets pay a much lower rate of interest than the interest that the RBI needs to pay on bonds it sells to sterilise excess rupees in the financial system. This is referred to as the quasi fiscal cost and needs to be kept in mind.

The second problem with sterilisation is that it might lead to a situation where interest rates might go up, creating further problems. As an RBI research paper titled Forex Market Operations and Liquidity Management published in August 2018 points out:

“For example, when a central bank undertakes open market sale of government securities to absorb the surplus liquidity as a part of the sterilised intervention strategy, it could harden sovereign yields, which, in turn, could attract further debt inflows driven by higher interest rate differentials.”

What does this mean in simple English? When the RBI sells government bonds to carry out sterilisation, it sucks out excess rupees from the market. This might lead to interest rates going up. If interest rates go up more foreign money will come into India looking to earn that higher interest rate. And this will create the same problem all over again, with the demand for rupee going up and the RBI having to intervene in the foreign exchange market.

Any increase in interest rates will not go down well with the government which will end up borrowing a lot of money this year, thanks to a collapse in tax revenues. Take a look at the following chart which plots the 10-year government bond yield from the beginning of 2020. The 10-year government bond-yield is the return an investor can expect per year, if they continue owning the bond until maturity.

Down and then slightly up

Source: https://in.investing.com/rates-bonds/india-10-year-bond-yield-historical-data

Thanks to all the easy money created by the RBI there has been excess money in the Indian financial system, since the beginning of this year. This has helped drive down bond yields from around 6.5% at the beginning of the year to a low of 5.76% in July and to around 6.04% currently. Hence, the Indian government has been able to borrow at a lower rate thanks to the excess liquidity created by the RBI and it wouldn’t want that to change. Also, the yields have been rising gradually since July, making sterilising even more difficult.

If the RBI keeps intervening it creates the risk of increasing money supply and that leading to the risk of even higher inflation. A high inflation in a poor country is never a good idea. If the RBI does not intervene that leads to the rupee appreciating and in the process creating problems for the domestic industry as well as the atmabnirbhar strategy. The exporters suffer as well.

What’s the RBI’s best strategy here? It can pray that foreign inflows slow down for a while, like they have in September. But that was basically the FIIs reacting to the Indian economy contracting by nearly a fourth between April to June. This data point was published on August 31. Also, as the economy keeps opening up more and more, imports and other spending pick up, the demand for the dollar will go up as well. All this will help the RBI. Nevertheless, if Western central banks unleash even more money printing, then all this will go for a toss.

The RBI ended up in this position by abandoning its main goal of managing price inflation. The agreement between the government and the RBI states clearly that “the objective of monetary policy is to primarily maintain price stability [emphasis added], while keeping in mind the objective of growth.”

Instead of managing inflation, the RBI chose its role as the debt manager of the government to outshine everything. This led to all the excess liquidity in the system so that interest rates were driven down and the government could borrow at lower interest rates. The Times of India reports on October 1, 2020: “The weighted cost of borrowing [for the government] during the first half was 5.8%, the lowest in 15 years.”

While the government has borrowed more, the overall non-food credit given by banks has shrunk between March 27 and September 11, from Rs 103.2 lakh crore to Rs 101.6 lakh crore. The banks lend money to the Food Corporation of India and other state procurement agencies to primarily buy rice and wheat (and some oilseeds and pulses in the recent past) directly from the farmers. Once this credit is subtracted from overall credit of banks what remains is non-food credit.

What this tells us is that despite lower interest rates overall lending by banks has shrunk. This might primarily be because of people and firms prepaying loans as well as a general slowdown in loan disbursal. Of course, the fall in interest rates has hurt savers and nobody seems to be talking about them.

To conclude, the RBI abandoned its main goal and is now stuck because of that. As economists Raghuram Rajan and Eswar Prasad wrote in a 2008 article : “The central bank is also held responsible, in political and public circles, for a stable exchange rate. The RBI has gamely taken on this additional objective but with essentially one instrument, the interest rate, at its disposal, it performs a high-wire balancing act.”

By trying to do too many things at the same time, RBI ends up being neither here nor there. As Rajan and Prasad put it: “What is wrong with this? Simple that by trying to do too many things at once, the RBI risks doing none of them well.” This was a mistake the RBI used to make pre-2015, before the agreement with the government was signed. It has gone back to making the same mistake again.

As Rajan wrote in the 2008 Report of the Committee on Financial Sector Reforms: “The Reserve Bank of India (RBI) can best serve the cause of growth by focusing on controlling inflation.”

But that’s not to be, given that politicians, bureaucrats and even economists, expect monetary policy to perform miracles it really can’t.

I would like to thank Chintan Patel for research assistance. 

 

Are Acche Din Here for Onion Farmers and Consumers?

Yesterday (September 22, 2020), the Rajya Sabha passed the Essential Commodities (Amendment) Bill, 2020. The Lok Sabha had passed the Bill a week back on September 15. The passage of this Bill essentially dropped cereals, pulses, oilseeds, edible oils, potatoes and onions, from the definition of essential commodities.

The government may regulate the supply of food items only under extraordinary circumstances like war, famine, extraordinary price rise and a natural calamity of grave nature.

In this piece we will concentrate on what this change means in the context of onions.

India grows 10% of the world’s onions. It is the second largest producer of onions in the world, after China. In 2019-20, the total onion production across the country stood at 251.46 lakh tonnes. But despite being the second largest producer in the world, the price fluctuations of onions within the country are huge.

In fact, on more than a few occasions in the past, the price of onions has crossed Rs 100 per kg, causing a lot of pain across households, with the onion being an important ingredient in different kinds of food all across the country. Elections have been lost on the price of onions going up, making it a politically sensitive vegetable.

Take a look at the following chart, which basically plots the inflation of onions as measured by the consumer price index. Inflation is the rate of price rise.

Up and Down


Source: Centre for Monitoring Indian Economy.

(The curve is broken towards the end because data for a couple of months wasn’t available due to the covid-pandemic).

The inflation of onions is all over the place. It just tells us how volatile onion prices are at the consumer level. It’s not just the consumers who face this volatility, even the farmers face volatility in the price they get for the onions that they grow.

All over the place

Source: Centre for Monitoring Indian Economy.

The above chart shows the volatility of onion prices at the wholesale level. And the way the curve goes up and down, tells us that onion prices move around quite a lot, even at the wholesale level.

What does this mean for the consumer and the farmer? The onion consumer doesn’t get to buy onions at a consistent price, the prices go up and down, quite a lot. On the other hand, the onion farmer doesn’t get to sell onions at a consistent price. There is always a chance that when the farmer goes out to sell the onions he has grown, there is a price crash. In that sense, growing onions for a living becomes a very risky profession.

The question is why are onion prices so volatile? This is where things get interesting. Take a look at the following chart (I know, I am throwing a lot charts at you, dear reader, but these are simple straightforward charts.) The chart plots the wholesale prices of onions through the months, over the years.

Rise in wholesale onion prices

Source: http://ficci.in/spdocument/23156/FICCI’s-paper-on-Onion-Crisis.pdf

What does the chart tell us? It tells us that the wholesale onion price start rising around May and they keep rising till around August-September. This is where the entire problem lies, both for consumers as well as farmers.

Why is that the case? The onion has three harvesting seasons; the Rabi season (March-May), the Kharif season (October-December) and late Kharif season (January-March). Close to 60% of the onion production happens during the Rabi season.

Also, the onions produced during the Rabi season are most amenable to storage. The supply of fresh onions hitting the market between May to September is simply not enough to meet the demand. Given this, a part of demand has to be met through stocks of Rabi onions maintained by traders and wholesalers.

When the supply from the Rabi season starts to run out, the price of onions tends to rise. If there are any rains it makes the situation worse. The rains not only destroy the early Kharif crop which starts hitting the market in late September-early October, but they also destroy the Rabi crop that has been stored.

In fact, this is precisely what has happened in 2019 as well as 2020. As the Economic Survey for 2019-20 points out: “Due to heavy rains in August-September, 2019, the kharif crop of onions was adversely affected leading to lower market arrivals and upward pressure on onion prices. This kharif crop usually caters to the demand during the period from October to December till fresh produce from late kharif crop comes in the market.” Something similar has happened this year as well, with rains destroying the onion crop in Karnataka.

Hence, as an economist would put it, there is a structural problem at the heart of the onion trade in India. The government notices this only when there is a price rise and the media starts splashing it. Hence, there is always a knee-jerk reaction.

The government has a fixed way of reacting. It either invokes the Essential Commodities Act (ECA), 1955, or bans exports of onions (and if not that, it makes exports unviable by increasing the minimum export price).

Last year, on September 29, stocks limits under the ECA were imposed. Retail traders could stock up to 100 quintals of onions and wholesale traders could stock up to 500 quintals. (One quintal = 100 kgs. This was later reduced to 20 quintals and 250 quintals, respectively).

The idea here being that as soon as stock limits are imposed anyone who has onions stocked beyond the limit will have to sell them in the open market and that will push down wholesale prices and in the process retail prices (at least, that is what the government hopes).

This year on September 14, onion exports were banned under the Section 3 of the Foreign Trade (Development and Regulation) Act, 1992. The trigger was the more than doubling in the average price of onion arriving at India’s biggest onion market at Lasalgaon near Nashik, between end of March and September 14.

The modal price of onion as of March 30 was Rs 1,301 per quintal. By September 14, the modal price had jumped to Rs 2,801 per quintal. After the export ban on September 14, on September 15 the wholesale onion prices crashed to Rs 1,901 per quintal. Obviously, this did not go down well with the onion farmers.

The third option that the government resorts to is the import onions. This does not bring immediate consumer relief because imports carried out through government institutions take time. Even after onions have been imported, there is trouble is storing, distributing and selling them, because government institutions involved in this process, really don’t have the expertise for it. Also, in the past, the taste of imported onions hasn’t really gone down well with the Indian consumers.

So, what’s the way out of this mess? Let’s take a look at this pointwise.

1) The ECA is a remanent of an era when India had genuine food shortage. The idea was to restrict activities of some agents who were indulging in black marketing and hoarding at that point of time.

As a July 2018 report titled Review of Agricultural Policies in India published by the Organisation for Economic Co-operation and Development, points out: “Orders issued by the centre or the states regulate the production, storage, transport, distribution, disposal, acquisition, use or consumption of a commodity.”

While, we do have our share of problems with some food products where the price volatility is very high (pulses and onions in particular), the days of food shortage are long gone. Also, over the years, the fact that ECA exists has undermined investments in India’s agricultural supply chain infrastructure.

As the Economic Survey of 2019-20 points out:

“ECA interferes with this mechanism by disincentivising investments in warehousing and storage facilities due to frequent and unpredictable imposition of stock limits. As stockholding limits apply to the entire agriculture supply chain, including wholesalers, food processing industries and retail food chains, the Act does not distinguish between firms that genuinely need to hold stocks owing to the nature of their operations, and firms that might speculatively hoard stocks.”

This fear of stock holding limits essentially leads to entrepreneurs staying away from creating supply chain infrastructure.

2) The lack of storage facilities adds to the price volatility of onions. As per a report titled A Report on the study of Onion Value Chain, published by the College of Agricultural Banking, Reserve Bank of India, 20-25% of onion production is lost due to post-harvest damages. This is because of the lack of storage infrastructure.

As the report points out:

“Nearly, 60% of the onion produced in Maharashtra during Rabi/ summer is available for storage i.e. 27 lakh tonnes out of total 45 lakh tonnes. The storage capacity created in the state through different government schemes is 8 lakh tonnes. These are scientifically built onion storage structures. Farmers store 5 lakh tonnes of onion in traditionally built local storage structures. Thus the total storage capacity in the state is 13 lakh tonnes.”

What this means that as of 2018, there was a need to create onion storage structures of additional 14 lakh tonnes, just in Maharashtra. Both the ECA and the lack of bank finance come in the way.

3) The ECA also leads to a situation where traders aren’t able to store enough and this creates problems. Let’s take a look at what happened last year. The ECA was invoked in end September. The onion inflation in the coming months just went through the roof (you can take a look at the inflation charts earlier). The stock limits basically ensured that traders couldn’t store onions beyond a point.

As the Economic Survey pointed out:

“Most of the kharif crop, which itself was lower, would have had to be offloaded in the market in October itself [thanks to the stock limits under the ECA]. Absent government intervention through ECA, traders would store a part of their produce to ensure smooth availability of a product at stable prices throughout the year.”

Of course, this does not mean that onion prices wouldn’t have gone up post September. They still might have gone up because of the lower kharif production, but the prices would have risen in a smoother way.

4) The government also resorts to export bans or increases the minimum export price of onions (where you can still export as long as the customer at the other end is ready to pay the higher price). The idea as mentioned earlier is to increase the supply in the domestic market.

In 2018-19, India exported around 22 lakh tonnes of the onions it produced. This was worth around $500 million. The total onion production during the year had stood at 228.2 lakh tonnes. Hence, less than 10% of the onion produced was exported. Also, the value of onion exports isn’t very big in the overall scheme of things.

As per a FICCI document, India’s export policy towards onions was changed 14 times between 2014 and 2019. This does no good to India’s image globally on the export policy front. It makes us look terribly unreliable.

Also, while prices in the Lasalgaon market fell on September 15, a day after the export ban, they have risen since then, and on September 23, the modal price of onion stood at Rs 3,600 per tonne. So much for the policy benefiting the consumer.

So where does all this leave us? The government has removed onions from the list of essential commodities in the hope that it leads to the development of storage infrastructure.

As Minister of State for Consumer Affairs, Food and Public Distribution Danve Raosaheb Dadarao told the Rajya Sabha:

“The stock limit conditions imposed through the law were hindering investment in the agriculture infrastructure… The move will boost investment in the agriculture sector and will also create more storage capacities to reduce post-harvest loss of crops.”

The move is also expected to increase the income of farmers.

The question is will this work out in the way the government is projecting it to be? Let’s look at this pointwise.

1) While, the government has removed onion from the list of essential commodities, its export continues to be banned. So, what kind of signal is being sent out to anyone who is interested in building agriculture infrastructure, including onion storage?

2) Even though onion is no longer a part of essential commodities, the government can still intervene, under extraordinary circumstances like war, famine, extraordinary price rise and a natural calamity of grave nature.

How is extraordinary price rise defined as?

“Any action on imposing stock limit shall be based on price rise and an order for regulating stock limit of any agricultural produce may be issued under this Act only if there is— (i) hundred per cent increase in the retail price of horticultural produce; or (ii) fifty per cent, increase in the retail price of non-perishable agricultural foodstuffs, over the price prevailing immediately preceding twelve months, or average retail price of last five years, whichever is lower.”

In the last three years, retail onion inflation has been more than 100% in eight months. Clearly, there is a good chance of high onion inflation in the time to come, given that any onion storage infrastructure isn’t going to be built overnight. Will the government intervene? Or will it sit tight and let the end-consumer pay?

The larger point here is that what the government does on this front in the time to come will determine how many entrepreneurs get interested in building agricultural infrastructure.

Just because onion is out of the essential commodities list doesn’t mean that the government cannot intervene. Any prospective entrepreneurs will like to see more evidence on this front.

3) There is great fear (as has been the case with the two main Farm Bills) of big business taking over. The question is if private enterprise is not allowed to operate in this sector, then what’s the way out? The government doesn’t have the money or the wherewithal to do much here. Central planning has been failure the world over and that it is a failure here as well, isn’t surprising.

Big business has built a lot of things since 1991, which most of us use and enjoy. Of course, along the way there has been crony capitalism as well. And that’s the fear here in the minds of people as well. (I don’t have a clear answer for this and I am saying so).

To conclude, taking onion out of the essential commodities list is just the first step. Many other things need to be done before the consumer can pay the right price and the farmer can get the right price.

In an ideal world, these are things that should have started in May 2014, when Narendra Modi was elected the prime minister for the first time. It would have been best to carry out small experiments in states and see how they go, before a nationwide plan was unleashed. There is always a gap between theory and practice and it’s best to correct that gap at a smaller level.

I would like to thank Chintan Patel for research assistance.