Peeling back the layers of the Indian economy

Crying over onions

As I attempt to make Akuri-style eggs in my flat, I am chopping onions and thinking about the Indian economy. Honestly, I had a late night; I probably shouldn’t be thinking about anything this early in the morning. Let alone the Indian economy. But, it’s hard to chop an onion in India and not think about the economy. Why?

Because they make me cry? Well, sort of, but not really.

Because onions have layers like the economy? True, but not exactly.

Then, why? Because onion prices are on the rise, and it seems that economists think a lot about onions, especially as a potential indicator of inflation.

Like other cuisines, Indian cuisine uses onions as the basis for Indian mirepoix. In French cuisine, that ratio is 2 parts onion, 1 part celery, and 1 part carrots. In Indian cuisine, the ratio is 2 parts onion, 1 part garlic, and 1 part green chilies. The humble onion is no less critical than in other cuisines. However, a mirepoix is just the beginning of the onion’s use in Indian cuisine. I was reminded again today that every Indian dish begins with onions (except in Jain cuisine). Onions are pickled, served as starters, and fried as toppings. Onions are also an essential ingredient in the ubiquitous Indian pickle (not to be confused with the dill pickles favored by expats). These multiple uses are why onions are such an important part of the Indian diet, especially if you consider the large vegetarian population. When onion prices increase, the overall cost of food increases as well. Interestingly, a recent Times of India graphic showed that onions are not the most expensive food staple; beans are. Yet, the focus of the Times article is onion prices. Why? Well, I suppose you can live without dal, but you must have onions to make dal makhni. For average Indians, even a 10-rupee increase in the price per kilo of onions can represent a significant hit to their buying power. Onions are a very emotionally sensitive commodity. The last time prices rose this dramatically, there were riots, and the ruling party was summarily ejected from office.

For my American readers, the closest equivalent foodstuffs are bread, milk, and eggs. For Americans, those commodities are considered essential. If the price of onions rose, we would hardly blink an eye. Mess with our milk and eggs on the other hand, and look out!

In Houston, many people run to Walmart or HEB the moment they hear that a hurricane might possibly strike sometime in the vague future.  Even though these items are highly perishable and not likely to withstand long periods without refrigeration, everyone stocks up on these essentials. That’s how Indians view onions: essential. Not a luxury foodstuff to be enjoyed when times are good, but a critical part of the daily Indian diet.

In the last three months, the price of onions has climbed by almost 50 rupees to Rs. 70 per kilo. In mid-August, while most expats here were still on monsoon break, the price of onions shot up by 38% in a single day. Imagine if milk shot up that much in a single day.

This graphic from Thomson Reuters illustrates the spike in onion prices:

The graphic illustrates the dramatic spike in onion prices in India.

The graphic illustrates the dramatic spike in onion prices in India.

 

A few weeks ago, a fight broke out at the Agricultural Produce Market Committee (APMC) onion potato market in Vashi. The cause: fluctuating onion prices. The result: a Saturday shutdown. Several factors have contributed to tensions like those seen in the Vashi market. Supplies are low as a result of fewer crops being planted this year and damage to those crops that were planted. Moreover, the weaker rupee has encouraged some suppliers to export the crops they have harvested rather than keeping the onions in India. All these factors increase demand in the domestic onion market, leading to the rise in retail prices. Some traders are hoarding onions in anticipation of these higher prices. Analysts are divided on whether the arrival of the October crop will moderate prices. In the Economic Times, Usha Tuteja, acting director, Agricultural Economics Research Centre, University of Delhi, has argued the price increase “is the result of production not keeping pace with demand, inefficient retail chains, and lack of regulation.” All these factors are long-term problems that need long-term solutions.

Is Mr. Rajan crying over onions?

In September, I introduced you to Mr. Raghuram Rajan, the RBI’s new governor. Is he crying over onions, too? A recent satirical article in The Unreal Times claims Mr. Rajan tried to bargain with an onion trader who refused to cut him a deal on onions and thinks the price increase is “simply ridiculous, man.” His solution: raise the repo rate by 2000 basis points to bring the cost of onions down. The satire has the ring of truth to it. Recently, Mr. Rajan has taken some steps that seem to indicate that inflation is his primary concern, and onions are a leading indicator. The decision to raise the repo rate last month was met with a bit of a panic in the Indian markets. The SENSEX plummeted. The papers questioned whether Mr. Rajan’s star had dimmed a little.

Repo rate: The rate at which the RBI lends to commercial banks. Raising the rate discourages borrowing and reduces the amount of currency in the economy.

Just a few days ago, the RBI raised the repo rate again another 25 basis points. This time, the SENSEX market rallied despite the RBI recently downgrading the growth rate below 5%. Doesn’t seem rational does it? The same policy decision two months in a row elicits a completely different response from the market. Yet, many economists, like this year’s Nobel Prize Winner Eugene Fama of the Booth School at the University of Chicago, argue that markets are rational and efficient. Markets, maybe. People, no. Newspapers and other media outlets, certainly not.

Onions represent just a small slice of the Indian economy. Yet, that slice offers great insight into the effect that market pressures have on our daily lives. So, keep an eye on those onions, and try not to let them bring you to tears.

3 thoughts on “Peeling back the layers of the Indian economy

  1. You’ve done it again, Jean! You managed to make talk of economics interesting, AND you made onions absolutely fascinating! To top it all off, you make it all very understandable to economics-challenged individuals like I am! I really enjoy reading what you write! Keep it up!!!!!!

    Like

  2. Pingback: In the shadow of the Shiv Sena Bhavan: A Finely Chopped food walk | Magnolia2Mumbai!

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