Vivek Kaul
Rahul Gandhi, aspiring politician and vice-president of the Congress Party, recently said that his mother cried when she couldn’t cast her vote on the Food Security Bill. Of course, the tears of a mother are precious to any son. But what about the tears in the eyes of the aam aadmi as onion prices touch Rs 100 per kg, in some parts of the country?
As per the recently released wholesale price inflation numbers, the price of onion has risen by 323% in the last one year. Vegetable prices during the same period went up by 89.37%. Fruits were up at 13.54%. And all in all food prices were up by 18.4% in comparison to the same period last year.
So why have onion prices been rising at such a rapid rate? Research Analysts Neelkanth Mishra and Ravi Shankar have some sort of an answer in a report titled Agri 101: Fruits & vegetables—Cost inflation dated October 7, 2013. A few states dominate the production of vegetables. “In particular, Maharashtra dominates the onion trade (45% of national production by value), while West Bengal produces 38% of India’s potatoes, 49% of India’s cauliflower and 27% of India’s aubergines (brinjals),” write Mishra and Shankar.
And it is this concentration that creates problems. As the Credit Suisse analysts point out “This concentration creates problems in generating a nationwide supply response in case a particular geography sees bad weather or any other disruption (e.g., onions in Maharashtra). This also drives significant variation in prices across the country.” Rains had damaged the rabi crop of onions, which is produced between March and May. The kharif crop of onions has also been damaged by unseasonal rains. This crop starts coming into the market by the end of September.
But has this led to a shortage of onions in the country? R P Gupta, director of National Horticulture Research & Development Foundation told the Week magazine recently that “I have been saying since July that there is no shortage of onion in the country..Official figures show that 27.5 lakh metric tonnes of onion were stored during February and May. Monthly consumption of the country is only 7-8 lakh tonnes per month…. So, where was was the problem of shortage?”
The only possible explanation is hoarding by traders in the key onion producing state of Maharashtra. As is well known the Agricultural Produce Marketing Committee (APMC), which runs the onion trade in Maharashtra, is largely said to be controlled by Sharad Pawar’s Nationalist Congress Party.
As the Week article points out in the context of the Lasalgaon mandi in Nashik, Asia’s largest wholesale market for onions “Powerful traders…manipulate the market. They book stocks from farmers at low prices, much in advance. Thousands of tonnes of onions are hoarded to create a short-supply. And as the prices spiral up, the hoarded stocks are released. It was such an artificial scarcity that allegedly spiked onion prices to record highs. “Traders in Lasalgaon Agricultural Produce Market Committee alone earned more than Rs.150 crore in just four days (August 12-15) this year,” says Dr Giridhar Patil, a farmer-activist.” This explains to a large extent why onion prices have been high all through the year.
The supply chain for the onion to move from the farmer to the end consumer remains very weak. As a recent Wall Street Journal article pointed out “A cultivated crop by a farmer in a far-flung village goes through as many as four intermediaries before reaching the local vegetable market in a semi-urban or urban area. These middlemen, wholesalers, traders and commission agents, usually charge fees and analysts estimate that by the time the vegetables make it to the stands in a retail market, their price has increased by almost six times.” This explains to a large extent why at times there is no link between the wholesale price of onions and the final price at which you and me buy it at. s
The Times of India reports that on October 22, 2013, the average wholesale price of the new onion crop at Lasalgaon was Rs 3,900 a quintal. This was 37% cheaper than in the summer. Despite this, prices at the retail level have not dropped.
NCP boss Sharad Pawar, who also happens to be Union Minister of Agriculture, had said on September 17, 2013 that “There is a lot of talk about the rise in onion prices; however, when prices fall no one shows any concern for the farmers. When farmers are getting more money for their produce we should not complain.”
Now if onion is coming in at Lasalgoan mandi in Nashik at Rs 3900 per quintal or Rs 39 per kg, and selling in Delhi at Rs 100 per kg, how is the farmer gaining? As explained above, it is the middlemen who are making the bulk of the money.
In fact, a study commissioned by the Competition Commission of India(CCI) in 2012, came to a similar result. The study titled Competitive Assessment of Onion Markets in India found that “onion trade is unilaterally dictated by the traders and not farmers for the reasons: (i) Average farm size of onion growers is quite low. Unfavorable weather conditions and price risk for these small farmers resulted for a minimal role in price formation; (ii) Traders buy small lots from the market yards and pool the produce for sorting or grading at their packing houses and market different grades to different markets all over India. Lack of trading expertise, market knowledge and risk bearing capacity has prevented most of the farmers to make any dent in onion trading. Therefore, most of the trading is in private hands; (iii) Farmers generally take reference of the local markets‟ rates, while traders compare rates of all markets, including major distant and export market and then decide where to send their produce of a particular grades. This brings greater profits to them…(vi) Lack of capacity to conduct multiple roles (wholesaler and commission agent) prevents farmers and their organizations to compete with traders.”
Also, most farmers, unlike traders do not have storage facilities. So they end up selling onions as soon as they produce it. The Week report cited earlier points out “This year, however, almost 80 per cent of the rabi crop was bought by traders (in the Lasalgaon mandi) at Rs.800 to Rs.1,200 a quintal by February-March. So, only a maximum of 20 per cent of the total crop was left with farmers who had storage facility.”
In fact, these traders even collude to drive up prices. As the CCI study found out “Collusion was observed among traders in selected markets in Maharashtra and Karnataka, For instance, a visit to Ahmednagar APMC revealed that there was collusion amongst traders. While bidding on certain lots was taking place, traders started with about Rs 300 per quintal and kept bidding higher prices till one trader quoted Rs 400 per quintal and another bid at Rs 405 per quintal. The commission agent stopped the auction and produce was shared between two wholesalers. It should also be pointed out that in Vashi market about 60 per cent of farmers reported that sales were undertaken through secret bidding.” The APMC markets referred to above are controlled by the NCP.
So farmers are not the ones benefiting from an increase in onion price, even if Pawar wants us to believe that is the case. Also, even if one believes that the farmers in Maharashtra are benefiting what about farmers in other states of India? Aren’t they paying a significantly higher price for onions? The last that I checked Sharad Pawar was the agriculture minister of India and not Western Maharashtra.
The reaction of the government to this rise in onion prices has been very high handed. The telecom minister Kapil Sibal, when he was asked on September 17, if onion prices will rise further, had said “Why don’t you ask the traders this? The government is not the one selling onions,”.
This was the last thing one expected a senior minister in the UPA government, which has been very committed to the idea of food security, to say. Onion is an essential ingredient in almost all curry that Indians make, whether it is to cook vegetables or meat. And given that, it is an important part of food security.
Onion prices have rise at the rate of 323% per year. The vegetable prices have risen at the rate of 89% per year. The food security of the aam aadmi is in danger as the government sits around doing nothing as usual. Half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011).
Rahul Gandhi in a recent speech in Madhya Pradesh had said “They don’t understand that one can’t talk of development when the stomach is empty.” He had also said that “we understand your hunger.” Does he?
Or does the government want to supply rice at Rs 3 per kg and wheat at Rs 2 per kg, to two thirds of the country, so that people can buy onions at Rs 100 per kg? The joke as usual is on us.
The article originally appeared on www.firstpost.com on October 23, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Competition Commission of India
Why realty regulatory Bill is not a panacea it’s being out to be
Vivek Kaul
The Union Cabinet cleared the Real Estate (Regulation and Development) Bill on June 4, 2013. The passage of this Bill has been heralded as a move in favour of real estate buyers. The Bill has been in the works for more than six years now, that tells us how serious the government has been on making it a law.
There are several provisions in this Bill that point out towards the same. Real estate developers can launch new projects only once all the relevant permissions are in place. These permissions are to be displayed on the website of the developer and only then can construction begin.
If the promised home is not delivered on time, the buyer will be entitled with a full refund of the amount he has paid along with interest. Separate bank accounts are to be maintained for every project. Developers need to ensure that the money taken from buyers is used for that particular project and not diverted elsewhere. While advertising developers will have to use photographs of the actual site. Failure to do so will attract a penalty.
The Bill also seeks to establish a central appellate tribunal and individual states will be responsible for establishing state level regulators. Further, the Bill does not allow developers to take more than 10% advance from the buyers without a written agreement. This provision it’s felt will help curtail the amount of black money that goes into real estate.
All these provisions put together will help the buyers, seems to the major view coming out. But as the old English saying goes there is a many a slip between the cup and the lip.
First and foremost the Bill as and when it becomes an Act will be applicable only on new real estate projects. Hence, the real estate projects which have already been launched will not come under the aegis of the Act. This means that buyers of those real estate projects which have been delayed will continue to face problems.
The recent past has seen real estate developers launching more and more new projects and use the money thus raised to pay off their past loans. This has led to a situation where there is no money left to build the projects which have been launched. In order to get the money required to build these projects, newer projects are launched. So this modus operandi has led to a situation where projects are rarely delivered on time and are endlessly delayed.
The buyers who are facing trouble because of this will get no relief as and when the Real Estate (Regulation and Development) Bill becomes an Act. (You can read a more detailed argument here).
The Bill also talks about establishing a real estate regulator in every state. This is a very long term process. It calls for the recruitment of a lot of people who understand specific real estate regulation. The question is are there enough such people going around?
Also, any regulator takes time to become effective. Take the case of the Securities and Exchange Board of India(Sebi), the stock market regulator, which was established in 1988 and given statutory powers in the 1992, after the Harshad Mehta scam.
Immediately after Sebi was given statutory powers, the stock market had the vanishing companies scam, where companies raised money through initial public offers (IPOs) and disappeared. Sebi could hardly do anything about it and investors lost thousands of crores.
Towards the turn of the century there was the Ketan Parekh scam, which again caught the stock market and Sebi off-guard. Its only in the last few years that the stock market regulator has come into its own. So its effectively taken Sebi almost twenty years to become somewhat effective.
But even then Sebi has had huge problems dealing with Sahara. The moral of the story is that even regulators don’t stand much of a chance against big established business groups. So how will the real estate regulators go against real estate developers, who are known to be fronts for politicians? Then there is the question of whether the regulator will act in favour of consumers. The Insurance and Regulatory Development Authority, the insurance regulator, over the years has acted more in favour of insurance companies as an industry lobby than thought about people who buy insurance.
A major point in the Bill is that the developers will have to open separate bank accounts for each project and ensure that the money from the buyers goes into that particular project and not elsewhere, as is the case currently. On paper, this is probably the most important point in the Bill. But money is fungible, as anyone who has handled it will tell you. So the question is who will ensure that the money going out from the a particular project account is going towards that project and is not being used to by the developer to meet other obligations or simply being siphoned off.
This seems to be the job of the state level real estate regulators that the Bill seeks to establish. But will state level regulators be able to manage things at such a micro level? Will they have the required expertise? I have my doubts. Implementation of laws has never been a strong point with India and Indians.
Also this provision in the Bill has been significantly diluted over the years. As Dhirendra Kumar of Value Research writes in a column “Compared to the 2009, the government has weakened the anti-fund-diversion provisions of the Bill. In the 2009 draft, all funds collected from the buyers would have to be kept in a separa
te bank account, from which money could be taken out only for direct use of the project.” This has been diluted and the current version of the Bill allows developers to route only 70% of the money raised from buyers into a separate bank account. “This serves no purpose except to make it easier for developers to divert 30 per cent of the funds,” writes Kumar.
The Bill does not allow developers to take more than 10% advance from the buyers without a written agreement. This it is said will help in controlling black money. This to me seems like someone’s idea of a joke. When has any agreement prevented Indians from transacting in black money? Scores of developers across this country continue charging money in black separately for car parking, despite there being a Supreme Court order against the same.
The Bill also says that buyers will be entitled to a full refund along with interest if the developer does not deliver the project on time. This may not be of much help because even with the compensation, the buyer may not be able to buy a home. Home prices may have risen in the meanwhile. Also, after a project is delayed, you cannot expect the buyer to put money in a fresh project, which again promises to deliver a few years later, like the original developer did.
Buying a fully ready home may turn out to be expensive and beyond the budget of the buyer, even with the compensation. Given this, the buyer should be compensated either the price of buying a similar home in the open market, as promised by the builder, or refunded his money along with interest, whichever is higher.
Also, it is one thing to make a law which calls for the developer to pay up in case a project is delayed, and it is totally another thing to expect him to pay up. Take the case of DLF. The company was fined Rs 630 crore for abusing its dominant market position by the Competition Commission of India (CCI). As an article in Governance Now magazine points out “The CCI pronounced DLF guilty for grossly abusing its dominant market position in the relevant market and imposing unfair conditions in the sale of apartments to home buyers in contravention of the provisions of the Competition Act, 2002. The CCI also imposed a penalty of whopping Rs 630 crore.”
But there has been no damage to DLF. “Ever since the order came out, DLF has paid zero to CCI. Not only that. They have launched four different projects since then, despite of our continued objections to the CCI,” Amit Jain of the federation of apartment owner’s association (FAOA) told Governance Now. So if DLF can get away without paying a regulator, where is the question of developers paying the aam aadmi for delayed projects?
The politicians have already tweaked the provisions of the Bill in favour of the developers. In fact, in the 2009 version of the Bill only those projects which were less than a 1000 square metres and had less than four dwelling units were exempt from the provisions of the Bill. The current version of the Bill is applicable only to projects over 4000 square metres in size with no limit on the number of dwelling units. Also there is a twist in the tale. As Kumar writes “Even more alarmingly…when a project is executed in phases, then each phase will be considered separately. This means that even very large projects could just be broken up into sub-4000 meters phases and escape much of the regulatory oversight of the Bill and the regulator.” So all we know, the developers might exploit this loophole to the hilt.
To conclude, India does not have independent regulators. And people who head regulatory bodies report to politicians. Even the real estate regulators will report to politicians. And many politicians have significant interest in real estate, ensuring that developers will do what they want to do. The law of the land be dammed. Or as the old saying from the Hindi heartland goes “jab saiyyan bhaye kotwal to darr kaahe ka?(when my lover is the police inspector, what do I have to fear?). So deep runs the politician-builder nexus.
And the Bill does very little to address this. To be fair, one cannot expect any law to end the nexus. But if the Indian real estate scenario has to improve it is this nexus that needs to be broken. And that is not going happen anytime soon.
(The article originally appeared on www.firstpost.com on June 6, 2013)
(Vivek Kaul is a writer. He tweets @kaul_vivek)