The onion mania of the last month has by now settled into a fatalistic acceptance of onion prices at Rs 70 a kilo as one of those facts of life that must be endured because they cannot be cured. Meanwhile, dire predictions have been made of governments toppled by the Onion Revolution, packs of television anchors have bayed for the blood of ‘onion hoarders’, the Congress has discovered that Narendra Modi is responsible for high onion prices and murder has been done and robberies committed for the sake of the precious vegetable.
In the more tranquil atmosphere of today, one may wonder what led to the spectacular and unprecedented explosion in onion prices. Was it, as the Left fervently assures us, the product of conspiratorial price manipulation by monopoly traders, those vampires who suck the blood of us common folk while laughing all the way to the bank (assuming of course that vampires could have bank accounts and laugh)? This indeed is the popular view of most price bubbles: hoarders and speculators have done it, raking in the profits at the expense of the aam aadmi. In the words of that leader of public opinion so alliteratively (and appropriately) labelled by Shobhaa De “garrulous Goswami”, one does not need rocket science to know that when prices shoot up, hoarding is going on — and that if only the government, therefore, were to mete out exemplary punishment to a few of these avaricious traders, prices would come tumbling down. The government too, after a few feeble efforts to justify itself, is only too happy to join the chorus: after all, once the ‘real culprits’ have been discovered in the trading community, the government is off the hook — except perhaps for its excessive generosity in not hanging these culprits from the nearest lamp-post.
However, in the staid world of economics, away from the nightly cacophony on television, one is confronted by an uncomfortable fact. No hoarder can earn a penny until he sells his hoard. The only way he can make a profit is to buy when prices are low and sell when they are high. His activities have the effect of raising prices when they are low and reducing them when they are high. He must stabilize prices if he is to make any money. If price stability is your objective, the successful speculator is a social benefactor.
Not that there aren’t destabilizing speculators galore. These are the folk who buy (often with borrowed funds) and hold on to assets even as prices peak and are then forced into distress sales after prices have collapsed, who thereby heighten price crests and deepen price troughs, who lose heavily and are forced into bankruptcy. They are the tycoons who jump off skyscrapers and many of the farmers who commit suicide. They are the unfortunates who have gambled on the basis of erroneous beliefs about future prices and have lost and been punished by the market with a ruthlessness that will surely gladden the heart of any television anchor.
To make the same point differently, if indeed speculation accounts for price volatility, the government has a simple and profitable policy option — counter-speculation, using buffer stocks. It can build up its stocks when prices are at rock bottom, perhaps immediately after the harvest, and release them as the price cycle approaches its peak, thus thwarting the evil designs of those speculators who are currently hoarding in order to drive prices further up. Not only would the government stabilize prices thereby: it would also make money.
In fact, the government does no such thing — which is perhaps a blessing in disguise. A government agency involved in buffer-stocking would almost certainly mistime its purchases and sales, thus losing money and destabilizing prices. However, even the most sagacious government agency could have done little about the current crisis, which is not a matter of fluctuation about a constant level but of oscillation around a rapidly rising trend.
The onion crisis is not an isolated phenomenon. It is part of a general food inflation and specifically of a recent astronomical explosion of all vegetable prices with tomatoes touching Rs 100 to the kilo and cabbage prices rising 500 per cent over the last year. Obviously no one in his right mind would hoard tomatoes. If he did, his losses from his rotting stock would far exceed any possible gains from higher prices. Who then do we blame for the price spiral in tomatoes? Indeed, most vegetables — unlike shares, gold, real estate, even foodgrains — are far too perishable to be hoarded. If their prices are sky-rocketing, rocket science is not needed to see that one must look elsewhere for an explanation.
The explanation lies squarely in the realm of government policy. Not the policy of forbearance towards speculators but that of generating excess demand while reducing supply. A government in a paroxysm of anxiety about its electoral prospects has deluged the economy with subsidies for every conceivable group, driving up budgetary deficits and encouraging private borrowing. Its largesse to the urban sector, whether above board or below the table, has been spectacular and well-documented. However, much of this excess demand arises from the agricultural sector. Here, the cumulative consequences of the Mahatma Gandhi National Rural Employment Guarantee Act are coming home to roost. The MGNREGA is explicitly an employment guarantee scheme in which output is a totally peripheral concern. Machinery is essentially prohibited so as to maximize the impact on employment, rather like the reservations for handloom production that destroyed the Indian cotton textile industry. The low productivity of purely manual labour equipped only with the most basic tools means that the output of MGNREGA is insubstantial: the infrastructure that it supposedly creates is evanescent, rarely surviving one monsoon and its contribution to agricultural production and rural transport negligible. Meanwhile, it releases vast sums of money in the countryside, both to its legitimate beneficiaries and to those who cash in illegally on its many leakages. The immediate impact of this increase in rural incomes is on the demand for food; and with cereal consumption heavily subsidized in many states (and likely to be more so under the Food Security Act), vegetables must face this surge in demand. There is justice in the prime minister’s claim that vegetable prices have risen because those who once had just one vegetable now want two.
The problem of course, is that we rarely get what we want. The MGNREGA, while accelerating the circulation of money in the countryside, has curtailed output growth. It has diverted labour from actual agricultural production to the essentially Keynesian enterprise of digging ditches and filling them up. And, with a vast government demand for cereals at favourable support prices assured by the Food Security Act, whatever labour is available for agricultural production is concentrated on foodgrains. Vegetables simply miss out. Rural workers, when they want two vegetables, find that there just isn’t enough to go around. And the only way that balance can be achieved between surging demand and shrinking supply is through soaring prices.
Perhaps, falling oil prices and the generosity of the last monsoon may yet rescue us from hyperinflation. But in the run-up to the general elections, one cannot hope for a return of the prodigal from its extravagant ways. Our salvation, if it comes, will owe little to the government and nothing at all to the ‘hang-the-hoarder’ brigade.