Learning from the onion crisis

The Financial Express, India, February 17, 2011

By Pradeep S Mehta

Food price inflation in India is not an isolated conundrum. The same can be witnessed in many other countries as part of a global phenomenon. Without going deeper into this phenomenon, let us review the simple case of the recent onion price rise crisis. It is a sensitive issue as the onion is a staple food item for Indians. In the past, the issue has led to downfall of governments.

In fact, the production of onions did not fall below last year’s production. Yet, due to vagaries of weather like heavy rains, some of the onion crop was affected. This led to traders encashing the situation by raising prices beyond normal increases. The government got into action by banning exports and raising imports, including phlegmatic imports from Pakistan. Furthermore, income tax raids were conducted on traders, and the Competition Commission of India swung into action to investigate alleged cartelising behaviour of traders. Reportedly, income tax raids did not yield any evidence of collusion or any other misdemeanour. Traders howled, and the raids stopped while new arrivals brought down the prices by and by.

The allegation that onion merchants were colluding does not hold much water. Existing high onion prices may not necessarily be the result of collusion among traders, which is necessary to prove a violation under our competition law. The simultaneous increase in the prices of onion across India is a phenomenon known as ‘price parallelism’. Price parallelism is a mirroring effect where traders independently pursue their ‘unilateral non-cooperative best response’ in view of what other rivals are doing. Therefore, there is neither an explicit agreement nor a tacit understanding among the traders. For the purpose of investigations into cartels, price parallelism is an indirect economic circumstantial evidence, which, if taken in addition to direct evidences such as records of meetings, establishes the existence of cartelisation. However, solely relying upon price parallelism cannot prove cartelisation as there is no collusion.

In a case in the US—Interstate Circuit, Inc vs United States (1939)—the court accepted that collusion may be inferred from circumstantial evidence but warned against going too far. In a famous phrase, the US court argued that “conscious parallelism has not yet read conspiracy out of the Sherman Act entirely”. In short, parallel business behaviour by itself does not constitute a Sherman Act offence.

Even in India the position on price parallelism and collusion is the same. In ITC Ltd v MRTP Commission [(1999) 46 Comp Cases 619], it was held that three essential factors have to be identified to establish the existence of a cartel, namely agreement by way of concerted action suggesting conspiracy, the fixing of prices, and the intent to gain a monopoly or restrict/eliminate competition.

There have been instances where the MRTP Commission (the former competition authority) has tried to investigate cartels on suspicion of price rises or submission of collusive tenders in various industries such as tyre, sugar, yarn, plywood, cement, etc. However, they were not successful in proving the existence of a cartel because the evidence collected did not go beyond price parallelism. Hence they were not able to provide direct or indirect evidence, such as an agreement or meeting of minds to prove the existence of a cartel.

While escalating prices of onion cannot be attributed to cartels, probable reasons may range from demand-supply gap to hoarding of onions by traders. As per government’s own version, price rise is due to hoarding and the country had enough stocks of onion. Further, overall impact of unseasonal rains on onion prices does not justify the abnormal prices either, as only about 20% of the crop was damaged. On the other hand, economic analysts hold poor agricultural productivity, transportation and inadequate investment in agriculture as responsible for the crisis.

Looking at the situation from various angles, one could see that surely there was some artificial shortage in the market along with other factors affecting onion price. This further aggravated the onion crisis. If seen from a common man’s point of view, it only demonstrates a governance failure because onion is one of the most essential food items. Also, the spillover effect of high onion prices to other food products cannot be denied.

The government had very few available remedies to check this crisis immediately. The most effective tool is the Essential Commodities Act, 1955, which can be invoked by various states to check hoarding and black-marketing. In the long run, the government needs to invest more on growing essential food items such as onion. The most important action was for the government to have an early warning system and market watch. When heavy rains hit the crop, the government should have taken risk averting measures by garnering all its resources to ensure that the price rise was contained. These included tightening the enforcement mechanism and resorting to imports while regulating exports much before the crisis could have deepened. The same can happen for other commodities as well, and hopefully the government can start planning well in advance, by taking proactive measures rather than indulging in a reactive manner.

The author is the Secretary General of CUTS International. Vikas Kathuriya of CUTS contributed to this article.

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