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.

Learn from 2014: How the Modi govt can tame food prices

foodVivek Kaul

Earlier this month, the the India Meteorological Department(IMD) forecast that the monsoon will be deficient this year. It said that the monsoon will be 88% of the long-term average. This number is lower than the 93% of the long-term average number, the IMD had forecast in April, earlier this year.
The IMD also said that the probability of a deficient monsoon was as high as 66%. The nation’s weather forecaster uses rainfall data for the last 50 years to define what is normal. If the rainfall forecast for the year is between 96% and 104% of the 50 year average, then it is categorised as normal. A forecast of between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.
Hence, a forecast of 88% of the long-term average means that the monsoon will be deficient this year. Further, with the rainfall being forecast as likely to be deficient, the fear is that food prices will start to go up during the months to come.
Data from the World Bank suggests that only around 35.2% of agricultural land in India was irrigated in 2010. The bank defines irrigated land as “
areas purposely provided with water, including land irrigated by controlled flooding.” This number is a little dated but does tell us that a major part of Indian agriculture continues to remain dependent on rainfalls.
And if rainfalls turn out to be deficient chances are there will be an impact on agricultural production and in the process push up food prices. At least that is how things look theoretically. Nevertheless, things may not be as bad as they are being made out to be.
During 2014 monsoon season, the country as a whole received rainfall which was 88% of the long-term average. Hence, the rainfall last year was deficient. In fact, if we look at the numbers region-wise, the rainfall was around 79% of the long-term average in north-western India. States like Punjab, Haryana and Uttar Pradesh which produce a major part of food grains produced in India, come under this region.
Despite this, the impact on production was limited because these states have access to irrigation. As a recent report by Crisil Research titled
A washout monsoon forecast, we cut GDP growth by 50 bps points out: “Given their reasonably high irrigation levels, agricultural production in Punjab (98% of total area cultivated has irrigation), Haryana (85%) and Uttar Pradesh (76%) were less affected by deficient rainfall last year.”
The question is how effective will the irrigation systems be the second time around.
“Even with good irrigation cover in these states, two consecutive years of weak rainfall would bring down the effectiveness of irrigation systems…Ground water is recharged mainly through rainfall. As per IMD, rainfall deficiency in Punjab was 50% and Haryana at 56% last year. As a result, with agriculture relying more on ground water, two consecutive years of weak monsoon will have a significant impact on kharif crops. Plus reservoir storage levels in some states are alarmingly low,” Crisil Research points out. Given this, there will be some impact on agricultural production.
Hence, the government needs to act decisively and quickly to ensure that food prices do not go. As
economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note titled RBI signals no more cut; we still see room: “In 2002 and 2004, cumulative rainfall was down 19 % and 14% respectively, but thanks to an effective undertaking by the government that saw large scale disbursement from the government’s food stocks, inflation remained under control.”
In fact, the Narendra Modi government did the same thing when it came to power in May last year.
One of the first decisions made by the government was to release 5 million tonnes of rice into the open market from the stocks maintained by the Food Corporation of India. News reports suggest that eventually only around 2 million tonnes was sold. But just the news that the government was selling was enough to contain inflation.
As Baig and Das point out: “Last year, a late start of the monsoon rains resulted in a sharp spike in food prices during July (+3.6% month on month). Food prices generally tend to be high in July, but the spike in 2014 was striking. The newly elected government responded with a number of administrative measures (open market sale of key foodgrains, crackdown on hoarders, imposing restriction on stocking limits of key vegetables etc.), which helped food prices to eventually ease from September onward.”
Also, imports will help, given that global food prices are at a six year low. As Crisil Reearch points out: “I
mporting some commodities will be useful, especially because global food prices have slumped to a six-year low following a bounteous output – international prices of oil seed prices for instance are down 24% year-on-year.”
While prices of food grains can be contained by releasing government stock into the open market, such a thing is not possible in case of vegetables, given their short shelf life. Hence, it is important that the government cracks down on hoarders, like it did last year.
As Ashok Gulati, former Chairman of the Agricultural Costs and Prices, wrote in a column inThe Financial Express: “A slew of measures were announced by the government to contain the damage from surging food inflation. It not only restricted exports of onions but also imported onions and dumped them in major onion markets at prices below import cost. It also used the stick and raided many onion traders/hoarders.”
While onions can be stored, this may not be true for most other vegetables. Also, a lot of vegetable produce goes bad before it reaches the market, hence, “lowering transportation losses will be crucial”.
Further, there will be great pressure on the government to increase the minimum support prices on agricultural crops. That is one sure fire way of pushing up food inflation.
It is worth remembering here that not many farmers benefit from the minimum support price system. The government announces the minimum support price of 24 agricultural crops, but largely buys, only two, wheat and rice, through the Food Corporation of India and other state procurement agencies.
The Shanta Kumar committee report points out that the total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies was 5.21 million. “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013),” the report points out.
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, not all wheat and paddy is sold to procurement agencies at the minimum support price.
Once these factors are taken into account the minimum support price system doesn’t benefit many farmers and causes food inflation. Hence, it is important that the government stays away from the temptation of increasing minimum support prices by a big amount, something that it did last year as well.
To conclude, in order to control food inflation, it is important that the government do same things that it did last year.


(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on June 11, 2015

The risk of high food inflation hasn't gone away yet

 

 Onion_on_White

Vivek Kaul 

Consumer price inflation(CPI) for the month of June 2014 came in at 7.31%. This was the lowest since January 2012. Wholesale price inflation(WPI) for the month of June 2014 had come in at 5.43%, which was a four month low.
A major reason for the fall in overall inflation has been a fall in food inflation, which as measured by the CPI, stood at 7.90% during the month of June 2014. In May 2014, the rate had stood 9.4%. In June 2013, the rate was at 11.84%.
Food inflation has been controlled to some extent due to several steps taken by the Narendra Modi government, which was sworn into power in May 2014. The government has set limits on the export of staples like onions and potatoes. It also decided to sell 5 million tonnes of rice in the open market.
These steps have obviously helped in the near-term. But how do things look over the next few months? The
India Meteorological Department in a press release dated July 11, 2014, pointed out that the“rainfall activity was deficient/scanty over the country as a whole” for the period between July 3 and July 9, 2014. This deficiency of rainfall was at 41% of the long period average.
This delay in rainfall has led to a 51% annual decline in the sowing of
kharif crops. What this means is that there will be an impact on their production in the months to come, which is likely to lead to a price rise.
When it comes to rice and wheat, the government has enough stock to ensure that it can prevent a rise in their price. As on July 1, 2014, the Food Corporation of India,
had a food grain stock of close to 69 million tonnes, which is much more than the strategic reserve that it needs to maintain. A part of this stock can be sold in the open market, in case the lack of adequate rainfall has an impact on the production of food grains, in the months to come.
But the government does not have the same option when it comes to vegetables and fruits. WPI data suggests that vegetable prices fell by 5.89% in June 2014, in comparison to a year earlier. CPI data suggests that vegetable prices went up by 8.73% in June 2014, in comparison to a year earlier.
If we look at the breakup provided by the WPI data potato prices went up by 42.52% in June. A major reason for the same seems to be the fact that the delay in the rains has led to a delay in sowing, harvesting and supply of crops.
Data provided by
the National Horticultural Research and Development Foundation proves this. As on June 2, 2014, the potato prices at the Agra mandi were Rs 12.15 per kg and the arrival of potatoes was at 1350 tonnes. On July 14, 2014, the arrival of potatoes had fallen to 720 tonnes and the price had shot up to Rs 16.20 per kg. This explains to a large extent the dramatic rise in the price of potatoes in the month of June. The current trend suggests that the price of potatoes will continue to rise in July as well.
Also, despite a minimum export price of $450 per tonne being set, a huge amount of potatoes are being exported to Pakistan.
A recent PTI report suggests that “as much as 1,500 to 2,000 tonnes of potatoes are being exported to Pakistan per day through Attari-Wagah land route in the wake of scarcity of the main vegetable crop in the neighbouring nation.”
And what about onions? Onion prices in June 2014 went up by 10.7% in comparison to the same period in 2013. In June 2013, onion prices had risen by 114.76%. The onion prices between May and June 2014 rose by 16.06%.
The arrival of onions at Lasalgaon, the biggest onion
mandi in the country has come down between June and July. In June, the average daily arrival of onions had stood at around 1590 tonnes, at an average price of Rs 13.67 per kg. For the first half of July, the average arrivals have fallen to a little over 1200 tonnes at an average price of Rs 19.67 per kg.
This clearly is not a good sign.
A recent report in the Business Standard pointed out that the National Horticultural Research and Development Foundation put “the onion inventory across the country at 2.4-2.5 million tonnes.” The country consumes around 1.2 million tonnes of onions per month. This means that the current stock of onions will last till end of August 2014. “The problem will aggravate in September, when the existing stocks finish. The government should start importing,” RP Gupta, director of National Horticultural Research and Development Foundation told the Business Standard. Onions can last as long as six months. Hence, unlike vegetables, the government can import and store onions if it wants to.
Other than this, fruit and milk prices continue to rise at a very high rate. Fruit prices in June 2014 rose by 21.4%( as per the CPI) and milk prices rose by 10.82%(as per the CPI). Egg, meat and fish prices also rose by 10.27%(as per the CPI) in comparison to last year. This is an impact of the loose-fiscal policy run by the Congress led United Progressive Alliance government. As a recent report titled
What a Waste! Brought out by Crisil Research points out “Loose fiscal policy, rising demand for high-value food items and substantial increases in wages — especially in rural wages, as a spillover [of] the rural employment guarantee scheme — have translated into higher demand for proteins. This has raised the prices of items such as milk & milk products, egg, fish and meat as supply falls short of demand. The production of milk and eggs has risen by only 3-4% a year, compounded annually, during 2009-10 to 2012-13, while inflation in this category has risen 14-15% a year.”
Due to these reasons the risk of high food inflation will not go away any time soon.
The article appeared with a different headline on www.firstbiz.com on July 15, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

 

How the government makes you pay more for food

 food

Vivek Kaul


“God,” they say, “is in the details”. And so is the devil.
The wholesale price inflation(WPI), one of the ways to measure the rise in prices, touched 4.86% for June 2013. In May 2013, WPI had stood at 4.7%.
The worrying factor was that food inflation increased to 9.74%, due to an increase in price of onions, cereals and rice. During May 2013, food inflation was at 8.25%.
While an overall inflation of less than 5% sounds like a good situation to be in, it clearly is not, because of the high food inflation that prevails (I bought tomatoes at Rs 60 per kg yesterday evening and that hurts).
The point to remember here is that overall inflation is a theoretical construct where various goods and services have a certain weight attached to them. Food articles comprise of around 14.34% of the WPI basket. What this means in simple English is that if an individual were to spend Rs 100 on goods that comprise the WPI basket, he would spend Rs 14.34 on buying food.
But for most people the proportion of money they spend on food is higher than 14.34%. A discussion paper titled 
Taming Food Inflation in India released by the Commission for Agricultural Costs and Prices(CACP), Ministry of Agriculture, on April 1, 2013, makes the point. “An average household in India still spends almost half of its expenditure on food, and poor around 60 percent (NSSO, 2011), and that poor cannot easily hedge against inflation, high food inflation inflicts a strong ‘hidden tax’ on the poor…In the last five years, post 2008, food inflation contributed to over 41% to the overall inflation in the country,” write the authors Ashok Gulati and Shweta Saini. Gulati is the Chairman of the Commission and Saini is an independent researcher.
This means that rising food prices are a huge problem for most Indians. Vegetable prices went up by 16.47% in June vis a vis 4.85% in May. Onion prices went up by a whopping 114% against 97.4% in May. Price rise in cereals and rice was 17.2% and 19.1% respectively.
While each food product has its own reasons for the price rise, there are some broad generalisations that can be made. Take the case of rice and wheat. Their price rise can be directly attributed to hoarding by the government.
In a research paper titled 
Buffer Stocking Policy in Wake of NFSB (National Food Securities Bill) Ashok Gulati and Surbhi Jain of CACP point out “The country is currently loaded with large stocks. On July 1, 2012, e.g., it had 80.2 million tonnes, and is likely to have similar or even higher amount this year, despite emerging as the largest exporter of rice (around 10 million tonnes in calendar year 2012) and exporting about 5.6 million tonnes of wheat in FY 2012‐13.”
The situation seems to have continued this year as well. The food grain stock as on April 1, 2013, stood at 59.8 million tonnes against the norm of 21.2 million tonnes, that the government needs to maintain as on April 1, of every year.
One explanation for the hoarding is that the government was building up stocks to implement the food security scheme. But even after taking that into account, the government is hoarding onto more rice and wheat it requires to sell at subsidised rates. The CACP report estimates that anywhere between 41-47 million tonnes, would be a comfortable level of buffer stocks. This would be enough to take care of the subsidised grain that needs to be distributed to implement the food security scheme. At the same time it would also take care of the strategic reserves that the government needs to maintain, to be ready for a drought or any other exigency.
As on July 1, 2013, the government is expected to have around 82 million tonnes of rice and wheat. What this means that the government has an excess stock of nearly 30-40 million tonnes. As Gulati and Jain point out “The value locked in these “excess stocks”, evaluated at their economic cost, ranges from Rs 70,000 crore to Rs 92,000 crore. This infusion of “excess” money into the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns.”
The excess storage by the government causes inflation in two ways. There is lesser rice and wheat available in the open market, and this pushes up prices. In the last few years, the government has been buying and hoarding more and more of rice and wheat produced. In 2006-2007, the government bought 32% of the total rice paddy produced. In 2011-2012, this had shot up to a massive 54%. During the same period the procurement of wheat more or less doubled, from 18% to 35%. As a a report brought out by the
 Comptroller and the Auditor (CAG) General of India points out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-07 and 2011-12.”
In some states the procurement of grains has more or less been quasi nationalised. In states like Punjab, Haryana and now Madhya Pradesh and Chhattisgarh, around 80‐90% of the rice and wheat produced is bought by the government. This means the amount of rice and wheat available in the open market has come down dramatically and which in turn has pushed up prices.
The second reason for inflation is the fact that the farmers have already been paid anywhere from Rs 70,000-92,000 crore for the excess stocks that the government chooses to maintain. When this money is spent it leads to more money chasing the same number of goods and products, and thus adds to inflation.
In fact, high food inflation isn’t a recent phenomenon. It has been a regular part of our lives since 2008, when the Congress led UPA government decided to get ready for the 2009 Lok Sabha elections and go on a spending spree. During the period 2008-2009 to December 2012, the food inflation averaged at 10.13% per year. It has more or less continued at same levels since then.
The rise in expenditure of the government hasn’t been met by a rise in revenues and has thus led to an increase in fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends. The fiscal deficit of the Indian government in 2007-2008 (the period between April 1, 2007 and March 31, 2008) stood at Rs 1,26,912 crore. This jumped by 230% to Rs 4,18,482 crore, in 2009-2010 (the period between April 1, 2009 and March 31, 2010). It has since jumped to even higher levels and for the 2013-2014(i.e. The period between April 1, 2013 and March 31, 2014) it is projected to be at Rs 5,42,499 crore.
And it is this increased expenditure(reflected in the burgeoning fiscal deficit) of the government that has led to inflation. As Gulati and Saini point out “Indian fiscal package largely comprised of boosting consumption through outright doles (like farm loan waivers) or liberal increases in pay to organised workers under Sixth Pay Commission and expanded MGNREGA(Mahatma Gandhi National Rural Employment Guarantee Act expenditures for rural workers. All this resulted in quickly boosting demand.”
The sudden increase in government expenditure meant more money landing up in the pockets of citizens. And this money was spent leading to an increase in demand for goods and services. But this increase in demand could not be met with an increase in supply because of several infrastructure bottlenecks. As Gulati and Saini write “But with several supply bottlenecks in place, particularly power, water, roads and railways, etc, very soon, ‘too much money was chasing too few goods’. And no wonder, higher inflation in general and food inflation in particular, was a natural outcome…This study finds that the pressure on prices is more on protein foods (pulses, milk and milk products, eggs, fish and meat) as well as fruits and vegetables, than on cereals and edible oils, especially during 2004-05 to December 2012. This normally happens with rising incomes, when people switch from cereal based diets to more protein based diets. ”
Food inflation has now become a way of life for Indians, and is unlikely to go away any time soon. Even with that the government can look to at least control the rise in price of rice and wheat by trying to sell the excess stocks that it is hoarding onto. In fact, the irony is that the government doesn’t have enough space to store all the rice and wheat it is hoarding. The total storage capacity available is around 71.9 million tonnes. Now compare this to the total expected food grain stock of around 82 million tonnes as on July 1, 2013. What this means is that nearly 10 million tonnes of food grain is rotting in the open.
It is not rocket science to suggest that at least this stock can be sold off. It is always better if people eat rice and wheat, rather than the government letting it rot.
The article originally appeared on www.firstpost.com on July 16, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)

 

 

FDI debate: Why Sushma should get the stupid-statement award

sushma swaraj
Vivek Kaul
It’s that time of the year when awards are given out of for the best things and possibly the worst things of the year. And the award for the most stupid statement of the year has to definitely go to Sushma Swaraj, the leader of opposition in the Lok Sabha.
During the course of the debate on the government decision to allow foreign direct investment into multi-brand retailing or what is more popularly referred to as big retail, she said: “Will Wal-Mart care about the poor farmer’s sister’s wedding? Will Wal-Mart send his children to school? Will Wal-Mart notice his tears and hunger?”
These lines sound straight out of a bad Hindi movie of the 1980s with dialogues written by Kadar Khan. Yes, Wal-Mart will not care about the poor farmer’s sister’s wedding. Neither will it send his children to school. And nor notice his tears and hunger simply because its not meant to do thatThis is because Wal-Mart is a selfish company interested in making money and ensuring that its stock price goes up, so that its investors are rewarded.
The same stands true for every Indian company which is into big retail (be Tata, Birla, Ambani or for that matter Big Bazaar). No company, Indian or foreign, into big retail or not, is bothered about the tears of the farmer. And neither is the government.
Let’s look at some other things that Swaraj went onto say. “The remaining 70 percent of the goods sold in these supermarkets will be procured from China. Factories will open in China, traders will prosper in China while darkness will befall 12 crore people in India,” she declared.
Already a lot of what is sold in India comes from China. Around three weeks I went around several electronic shops in Delhi trying to help my mother choose a refrigerator. Almost all Indian brands had compressors which were Made in China. If one takes the compressor out of the equation what basically remains in a refrigerator is some plastic and some glass. And all that is Made in India.
My television set which is a Japanese brand is also Made in China. A leading Indian electrical company buys almost all the irons that it sells in India from China and simply stamps its brand name over it.
A lot of pitchkaris that get sold around the time of Holi and diyas and electronic lighting that get sold around the time of diwali are also Made in China. As a quote from a story that appeared in The Times of India story earlier this year went “It seems that ‘Made in China’ has researched our festivals and sensed the need of the customers. For the past 10 years, the business of local sprinklers is decreasing due to stiff competition with Chinese sprinklers. We are facing huge loss, plastic powder through which the pichkaris are prepared locally are bought at Rs 100 per kg while at the same time, there is no subsidy or relaxation on the name of festival,” shared Bihari Lal, a local manufacturer and trader of sprinklers.” Chinese made colours also available during Holi.
And none of this has been brought to India by Wal-Mart. It was brought to India largely by Indian entrepreneurs and traders, a lot of whom form the core voting base of the Bhartiya Janata Party (BJP) and also fund the party to a large extent.
Made in China has become a part of our lives whether we like it or not and it will continue to remain a part of our lives, with or without Wal-Mart. If Wal-Mart does not supply us with Made in China goods, the Indian entrepreneurs and retailers will surely do, primarily because Chinese goods are cheaper than the Indian ones. Hence, what Swaraj wants us to believe is already happening with no Wal-Mart in sight.
The other point that comes out here is the ability of Wal-Mart to source stuff from China. This is not rocket science. Indian retailers can also do the same thing. As Rajiv Lal of the Harvard Business School told me in an earlier interviewIf Wal-Mart is operating in Brazil there is nothing that Wal-Mart can do in Brazil that the local Brazilian guy cannot do. If you want to procure supplies from China, you can procure supplies from China as much as Wal-Mart can procure supplies.”
Swaraj also talked about predatory pricing that Wal-Mart would resort to. “These supermarkets introduce predatory pricing. At first, they will introduce such low prices, that will finish the rest of the market. Then when the customer has no other choice, they will keep hiking prices and looting the people,” she said.
This statement is also misleading As Rohit Deshpande of the Harvard Business Schoool told me in a recent interaction that I had with him “ For a company like Wal-Mart historical strategy is fairly easy to understand. It is to make a major branded product available cheaper. So you will have a wider assortment of branded product than any of their competitors that’s the first thing. The second thing is that they have private label. They keep increasing the percentage of their private label within each of their broad categories. So the consumers get trained to come to the store because they can find an assortment of branded products. And once they become loyal to your store then they find that they can make price comparisons within the store and they end up buying your private label. And then your margin is really so much better. It’s a strategy that has worked well for Wal-Mart.”
So for this strategy to work Wal-Mart has to ensure that they stock private label goods (basically their own brands) which are cheaper than other brands. Hence, Wal-Mart might decide to stock it’s own brand of soap which is lets say cheaper than Lifebuoy. For this strategy to work their own goods will have to be cheaper than other branded goods. Hence, it can’t keep increasing prices and keep looting people as Swaraj wants us to believe. Indians aren’t exactly idiots.
Also, if you have visited any of the big retail shops over the years you would have realised that these shops have been increasing the number of private label brands that they sell. As of now this is largely to limited to things like pulses, noodles, sugar etc. The point is that big retail in India is following the same strategy that Wal-Mart does worldwide.
The other interesting point that comes up here is that Wal-Mart is able to offer low prices primarily because of two things. One is the fact that it gets its real estate cheap because it typically sets up shop outside city limits. And two is the fact is the homogeneity of the population when it comes to consumption.
A typical Wal-Mart in the United States is situated outside the city, where rents are low. But such a strategy may not work in India. “It’s not easy to open a 150,000 square feet store in India. That kind of space is not available. They can’t open these stores 50 miles away from where the population lives. People in India don’t have the conveyance to go and buy bulk goods, bring it and store it. They don’t have the conveyance and they don’t have the big houses. So it doesn’t work,” explained Lal.
This is something that marketing guru V Kumar agreed with when I interviewed him sometime back. “Even if Wal-Mart is there in every place, the way they are located is typically outside the city limits. So only people with time, motivation and a vehicle, will be able to go and buy things. And the combination of these three things is very rare.”
The other factor as to why Wal-Mart may not be able to offer very low prices in India is because there is no homogeneity when it comes to consumption behaviour leading to a situation where the company may not have the same economies of scale that it does in other parts of the world.
As Kumar told me “Does the country as a whole consume common things or there are regional biases? In a country like Brazil people eat similar foods that every retailer can sell.” In India clearly things are different. “In India between South, East, West and the North, there is so much heterogeneity that you need localised catering and marketing. So consumption behaviour varies therefore unless you are willing to carry heterogeneous products in each of the locations it is tough,” said Kumar.
The point I am trying to make is that Wal-Mart is not such a big fear that it was made out to be by Swaraj. They do make their mistakes as well. As Deshpande told me “They have had hiccups in the interest of scale and cost efficiency. They have sometimes pushed products that did not make sense for the local market. An example, I believe it was in Argentina, where Wal-Mart, around July 4(the American independence day) had a lot of American flags shipped into their stores.
Pankaj Ghemawat, the youngest person to become a full professor at Harvard Business School makes an interesting point in his book Redefining Global Strategy. As he writes “When CEO Lee Scott (who was the CEO of Wal-Mart from 2000 to 2009) was asked a few years ago about why he thought Wal-Mart could expand successfully overseas, his response was that naysayers had also questioned the company’s ability to move successfully from its home state of Arkansas to Alabama…such trivialisation of international differences greases the rails for competing exactly the same way overseas at home. This has turned out to be a recipe for losing money in markets very different from the United States: as the former head of the company’s German operations, now shut down, plaintively observed, “We didn’t realise that pillowcases are a different size in Germany.””
Wal-Mart had to pull out of South Korea as well in 2006.
Hence, Swaraj could have clearly done some better research before making one of the most important speeches of her career. She could have read the recent column that P Sainath wrote in The Hindu , where he talks about Chris Pawelski, an American farmer and the onions that he produces.
As Sainath writes “While the Walmarts, Shop Rites and other chain stores sell his (i.e. Pawelski’s) kind of onions for $1.49 to $1.89 a pound, Pawelski himself gets no more than 17 cents. And that’s an improvement. Between 1983 and 2010, the average price he got stayed around 12 cents a pound. “All our input costs rose,” he points out. “Fertiliser, pesticide, just about everything went up. Except the price we got.” Which was about $6 a 50-pound bag. Retail prices though, soared in the same period. Distances are not the cause. The same chains sell cheap imports from Peru and China, driving down prices.”
The other interesting point that Sainath makes it that companies even dictate the size of the onions he produces. As Sainath writes “Pawelski held up the onion. “They want this size because they know you won’t use more than half of one of these in cooking a meal. And you’ll throw away the other half. The more you waste, the more you’ll buy.” The stores know this. So wastage is a strategy, not a by-product.”
Such examples on Wal-Mart and other big retail chains are not hard to find. A Google search throws up plenty of them. A speech against the negative effects of big retail should have been full of such examples instead of saying things like whether Wal-Mart will be bothered by farmer’s sister’s wedding. 

The article originally appeared on www.firstpost.com on December 5, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])