Anything that shines… is now an Onion?

Why are there pictures of onions on engagement rings instead of diamonds floating across emails or social networks? Why are onion prices compared to rising petrol prices? And it has been 3 years…3 whole years since there were speculations regarding shortages of onions in 2010. It is true that shortages of any goods/services are one of the reasons for rising prices. Other reasons include wars or natural calamities or failed harvest or all the three aforementioned altogether. So did we really experience shortages, natural calamities or continuous war that has affected supply of onions for the last 3 years? Before we go into a complaining mode and mock rising onion prices to engagement rings, let’s look at what onions really mean to us? Yes, the demand-side!

Onions are mostly associated with Indians for their culinary usage. Every dish, vegetarian or non-vegetarian (besides Jain food), requires onions. Onions complement every dish in taste, color, texture or aroma. It also has several medicinal properties but we needn’t even get there. In the context of economics, onions can be considered as complementary goods and I cannot think of… or do not know of an immediate substitute to onions. Now, complementary goods like onions are interrelated with the use of paired goods, just like sugar or milk acts a complement to tea, or chutney to idlies, etc. But onions are mixed into various food items…so they could be paired with cereals like RICE and WHEAT (rotis or Indian tortillas).

You might wonder how onion prices are associated with rice and wheat? Well! Let me clarify one thing about the usage of onions…It’s a vegetable mixed with other vegetables or meat to prepare a food dish. This food dish can be eaten either with rice or wheat (rotis) or both, which is how onions indirectly complement rice and wheat. To make things easy we can divide our country’s eating habits into rice eaters and wheat eaters. Being vegetarian or non-vegetarian is secondary and use of onions among vegetarians (minus Jain food) and non-vegetarians is mostly mandatory. And yes, you are thinking right. Rise in prices of onions will have a ripple effect on prices of other vegetables, meat, etc. Don’t you hear people talk about the rising prices of eggs and coconuts? Coming back to association of onion prices with rice and wheat prices…In economic terms, prices of goods that complement other goods usually have a negative relationship, which means a fall in prices of goods like rice or wheat should lead to an increase in the prices of complementary goods like onions. For example, when you go to watch a movie in a movie theatre, prices of popcorn are relatively higher than the market prices. It is like generating extra profit from a complementary food product like popcorn along with the purchase of a movie ticket.

Let’s look at some supply-side statistics also. According to the Food and Agriculture Organisation (FAOSTAT) India is the world’s second largest producers of onions and rice, following China and the third largest producer of wheat. Onions, rice and wheat are harvested twice in a year so that we can consume them throughout the year. And…we also export them to various countries across the globe, earning Rs. 1,967 crores from onions’ export, Rs 33,858 crores from rice exports and Rs. 10,529 crores from wheat exports as on FY13. Did you see that? Some 5-DIGIT crores of money from RICE and WHEAT exports!

The fact that we can export these agricultural products would mean that there is more than enough available in the domestic market. Exports, brings us to another phenomena that may have added more oil to the rising-onion-prices fire. RUPEE DEPRECIATION! Currently, the value of the Rupee is about Rs. 62 to a US dollar and at the same time this year in 2010, it was valued at Rs 45.06 to a US dollar. The value of the Indian rupee fell by Rs 17 in a span of 3 years, which may depict instability in both India and United States (which could be a different blog and I won’t digress into that now). Now to understand how rupee depreciation and inflation are related, you will have to ignore the instability bit and focus on exports earnings of onions, rice and wheat. So while you may think that the value of the rupee has lost value, we have earned more through rice and wheat exports making the prices for rice and wheat in domestic markets cheaper. India’s food prices are usually relatively inexpensive and foreign markets -want to buy these food items but for that they would need to buy India’s currency. An increase in supply of currency for foreign purchases of goods like rice and wheat (we export many items other than food) leads to depreciation. While foreign countries purchase more rupees, domestic prices for rice and wheat lose value and start declining, and this has really happened. If you check rice and wheat prices month-on-month or month-on-year for the last 3 years, they have gradually declined. With falling prices of rice and wheat, something that is dearer to us without whom the taste of the bhendi (okra) or butter chicken is incomplete …the onions… had to face the brunt L

Could this have been avoided? Yes! Through foresighted monetary policies but we were busy being greedy or being over-confident about our capabilities. Our standard of living did not exactly adjust to profits we earned with the depreciation and we never adjusted the wages to the inflation either. I fail to understand where that depreciated money’s profit has gone or is still going…Maybe I’ll figure it out and explain it in another blog, till then the questions or challenges to explore from this blog are:

– Whether the relationship between prices of onions with prices of rice and wheat is negative?

– Whether rupee depreciation has any relationship with inflation in India and prices of rice and wheat in particular?

– With the cyclone hitting Andhra Pradesh what will happen to onion prices?

Somebody? Anybody?


By Bhakti Joshi