Introduction
Demand and supply forces are often expected to determine the prices of a product in the market. However, sometimes these forces may lead to unprecedented price increases in the market that makes it necessary to have other forces to help regulate the market prices. In India, during the period of December 2010 and January 2011, the demand and suppy factors caused a sharp rise in onion prices that led to public outcry.
Onion is one of the most purchased products in the Indian market both by the rich and the poor. A sharp rise in the price of this product may affect the living standards of many Indians, especially those who are unable to afford the soaring prices. According to Dawe (2012), at first, the government allowed the forces of demand and supply to work out and help bring down the cost of the onion prices. However, the product became increasingly scarce and the price continued to increase with the increasing demand.
The government, fearing possible political repurcusions due to the soaring onion prices, was forced to come up with interventions to help address the problem. In this policy paper, the researcher seeks to analyze the forces that created sharp increase in the onion prices in India during this period with the view of offering the government advice on how to deal with a similar situation in future.
Objectives
According to Tucker (2017), when drafting a policy paper, it is important to come up with clearly defined objectives that should be achieved by the end of the project. In this paper, the following are the specific objectives that should be achieved.
- To determine factors that caused sharp rise in the onion prices in Indian during the period of December 2010 to January 2011.
- To identify areas where the government failed to act or acted inappropriately in arresting the soaring onion prices during the period.
- To come up with clear policy recomendations outlining how the government should act in future when faced with a similar situation.
The Key Issues
Onion is one of the most popular food spices in India, and the product is used both at home and in restaurants. It is a product that lacks a clear substitute, making it very important in the market. In the last two months of December 2010 and January 2011, the proce of onions have soared in the country and it almost reached a level that it was becoming a crisis. The political class are often sensitive of factors that influence onion prices in the market because they know the electorates may use it to determine those who come to power.
As an issue of public interest, the government is always under pressure to ensure that onion prices remain stable even during the festive seasons when the demand for the product increases. It is important to analyse this issue and find the source of the problem that caused onion prices to sharply increase over the last two months.
Economic Analysis for the Indian Onion Market
Normal circumstances in absence of government protection measures
Under normal conditions in the market, it is often expected that forces of demand and supply would determine the prices of onions in the Indian market, or any other market for any other product for that matter. The graph below shows how the forces of demand and supply define the price of the product under normal circumstances and in absence of government protection measures.
As shown in the above graph, under normal circumstances, the forces of demand and supply determine the price of onions in the market. When the quantity of onions increase in the market, there will be more products than the demand for it. As such, the price will fall. The supliers will be struggling to sell their surplus products to the same customers in the market, and the best strategy to attract customers is to lower the prices.
On the other hand, when the spply for the products drop, the demand rises sharply. It means that the market will be struggling for the limited supply of products in the market. The forces of supply and demand often define the pricing strategy in the market. When the prices of the product start rising to the abnormal levels, the traders often find a way of increasing the supply through such strategies as importation.
By importing onions from other countries, the traders will have enough products in the market that helps in regulating the price. When the prices in the market drop to abnormal levels because of the massive supply in the market, the traders will try to find ways of exporting the product to the international markets. Through exportation, the traders will be eliminating excess onions from the local market. The elimination of excess supply helps in regulating the price of the product in the market. As Ghonim (2012) observes, under normal circumstances, forces of supply and demand often regulates prices of a product even without government intervention.
Accordig to Goodwin et al. (2014), in normal circumstances when forces in the market define the price of a product in a fair manner, government interventions are often avoided. The interventions are avoided because sometimes they may disrupt these forces. The Indian government has been keen to avoid making interventions that may be construed to hurt either the public or the traders. As such, when these market forces are able to define market prices which customers and suppliers are comfortable with, then it is rare for the government to intervene.
Under such environments, the winners and losers are determined by forces of demand and supply. When the market has excess supply of products, the traders are forced to lower the prices of their products. As such, the ultimate winnners are the end consumers. The end consumers will enjoy the low prices while the suppliers will suffer from the reduced profitability of their products. When the supply for the products decrease, then things completely change as end consumers become the losers and traders become the winners. Traders will enjoy increased profitability for their products while end consumers will be forced to pay more for the products they purchase.
Excemptional circumstances in absence of government protection measures
There are some excemptional circumstances when the normal forces of demand and supply fail to regulate the prices of a product to the expected levels. This is exactly what happened in the last two months of December 2010 and January 2011 when the price of onions became unaffordable to most of the Indian families. According to Astyk (2012), the abnormality may be caused by artificial forces such as hoarding or speculations of possible decline in supply that would lead to further increase in the price of the product. The graph below helps in explaining this factor.
Under normal circumstances, it is expected that an increase in the supply of the product would help in lowerign its price in the market as the forces of supply and demand play off. However, the curves above shows an abnormal situation where an increase in the supply leads to an increase in its price in the market. This situation was seen when traders tried to increase the supply of onions by importing from neighboring countries.
However, the price of this product continued to increase. As Ghosh (2013) notes, such a situation is often caused by speculations in the market. There was a fear created by the traders that the price of onions may continue to rise because of the expected further decline in the supply of the product. Families and hotels moved in to purchase more of the product than they used to do before as a way of creating their own security in terms of having enough reserves.
Another possible problem that many analysts believed was the cause of the abnormality in the product price was hoarding. Hoardig is a common practice when traders believe that the prices of the products might increase in the near future.
The hoard their products waiting for the prices to increase before releasing them as a way of earning abnormal profits. This practice creates artificial shortage in the market. In such circumstances, the supply of the product in the market is just enough to meet the demand, but the traders create a scenario where the demand is seen to exceed the supply hence an increase in price is created. Government may be slow to intervene in such circumstances when it is still unclear what should be done to address the issue in the best way possible.
As mentioned above, sometimes the excemptional circumstances are created by traders keen on increasing the profitability of their products. In such cases, the winners are the traders while the end consumers become the losers. However, if the scenario is caused by forces beyond the control of the traders, then there are no winners. The traders will lose because they will have limited products to deliver to the market. Customers will suffer in terms of high prices they have to pay to purchase the product.
Excemptional circumstances with government interventions
In some excemtpional circumstances, the government may be expected to take actions in order to avoid cases where the public is unfairly exploited. It is the responsibility of the government to ensure that the public is not exploited by unscruplous traders who may want to charge high prices for their products. Government may intervene in many ways, but the main goal of such interventions when prices are high is to increase the supply. The graph below helps in understanding the shift in supply caused by government interventions.
The graph above shows a drastic case where the supply suddenly increase in the market. With the incrase in supply of the products, the demand automatically drops and it leads to a decline in the price of the product. This is common whe government takes incentives such as fighting unfair business practices such as hoarding. Through this intervention, suppliers will be forced to release the excess products that they were hiding.
It will leed to sudden increase in the quantity of products in the market. The Indian government also made an initiative to increase the supply by promoting importation of the onions from neighboring countries. Tax on imported onions were dropped and tax on export of onions was increased. As such, more onions were finding their way into the local market. The initiative helps in eliminating the acute shortage of onion in the market. With pleanty of supply of onions in the local market, the prices automatically falls. The government may sometimes be forced to intervene directly in setting the product prices, especially when the government is sure that traders are engaged in activities that are meant to increase the price of their products in the market.
Irrespective of the supply, the government may set maximum prices that the suppliers can charge on their products. Such price limits may be set on products that are considered basic in the market. In the scenarior where the government makes direct intervention to address the soaring market prices, there may be different winers and losers. If the shortage was created through hoarding, then winners will be consumers who will be paying reduced prices while traders will lose because they must be ready to sell their products at lower prices.
In case the government decides to help traders import onions from the neighboring countries, then both the traders and end consumers come out as winners. The profitability of the traders will not be affected. The consumers on the other hand will enjoy lower prices than was the case before. However, the government will be the loser because it will be forced to spend as a way of intervening.
Economic Market Analysis of Carrots in China
In China, carrot is one of the most popular agricultural products as it is used in preparing different types of food. It is a popular product in the Chinese market and it is always available throughout the year. According to a report by Razzaque and Basnett (2014), China is the leading producer of carrots in the world. Although sometimes the product is exported to other countries, most of it is consumed locally within the Chinese market.
Individual consumers and hotels purchase this product on a regular basis. In the past, farmers heavily relied upon natural rain to cultivate this crop. During that time, there were seasons for carrots and durations when the product was off season. However, most of the commercial farmers of this crop have merchanised their farm practices and are now using irrigation as a way of providing the much needed rain to their products. Although there are parts of the country where farmers still rely on natural rain, most of the commercial carrot farmers are now using irigation to reduce their overreliance on natural rain. The government has also created an environment that supports farmers of this crop to ensure that there is continuous supply of this product in the local market.
Market structure
In China, the market structure for carrots is similar to the market structure for onions in India. This is a product that is very poular in China and it is used on a daily basis. The price for this product is often determined by the forces of demand and supply. When the supply of the product is affected by forces such as excess rain that leads to the destruction of crops in the farms, then prices tend to shoot because of the increase in demand.
Carrot has a short life span once it is harvested. In fact, it has a shorter life span than onions. However, most of traders use refrigiration to help lenthen the lifespan of the products in the market. The use of technology in the market has played a significant role in regulating the price of this product in the market. It helps in ensuring that there is a continuous supply of the product in the market. When the product is in excess within the market, the traders are able to store their excess products in refrigirated godowns instead of dumping it in the market. As such, they avoid drastic drop in the price of the products.
When the supply declines, especially in between the major harvests, the carrots that were stored are released to the market. Ahmed (2014) says that this mechanism has helped in regulating the price of carrots in this country. In fact, most of the end consumers in major urban centers are rarely aware of the major harvest seasons for this product because it is always available in the market. The price of the carrots are often influenced by other economic forces in the market such as inflation or cost of complementary products other than the decline or sharp increase in its supply.
Government policies
The stability in the Chinese market for carrots over the recent past has made it less necessary for the government to intervene directly to help regulate the prices. However, there are measures that the Chinese government has often taken to support carrot farmers. One such incentive is making it easy for the farmers to use mechanization in their farming activities. The government has also subsidized farm inputs such as fartilizer to help lower the cost for farmers. According to Jha, Gaiha, and Deolalikar (2014), the Chinese government has been working closely with farmers to help them export their products to the international markets in cases of excess supply.
The profits earned in the internatonal markets helps the farmers to improve their production of carrots using modern means that rely less on natural forces. The incentives helps in ensuring that there is continuous supply of carrots, not only for export purposes but also for the local consumers. These incentives have helped significantly in maitaining stable prices for carrots in the Chinese market.
Policy Recommendations to the Indian Government
It is important for the Indian government to come up with concrete measures in the short term that will help address this crisis. In the last two months of December 2010 and January 2011, the country experienced an acute shortage of onion which has led to massive price increase. In this month of February 2011, the government must come up with immediate measures of addressing this issue. The measures that should be taken by the government can be broadly classified as long term and sort term measures as discussed below.
Short term measures
The current situation in the onion market makes it necessary for the government to take immediate measures to help deal with this problem in the most effective way possible. The government should find external sources for onions, especially in neighboring countries such as Bangladesh, Pakistan, and Nepal where prices are likely to be lower than that from China. After securing steady onion supply from the external markets, the government should come up with fixed prices for the onions in the local market. The set price should be affordably to all Indians irrespective of their social status.
To further increase the local supply of onions, the government should come up with new policies that makes exportation of onions very expensive. It can do this by directly imposing higher tax on those exporting this product. The local market will be more lucrative to them hence most of the products will be sold in the local market. The main advantage of this strategy is that it will increase the supply of this product locally. The suppliers who were hoarding their products will also be forced to release their products into the market because their goal of selling their products are exhbitant prices will be eliminated.
The outcome of this strategy is that it will help eliminate the current crisis of scarcity and high prices of onion in the Indian market. However, the main disadvatage of this strategy is that it will force the government to spend more, especially when traders have to be compensated for their loss because of the set maximum prices for the product. The tax burden will have to be pushed to the citizens.
Long term measures
When implementig the above short-term measures, the Indian government should be ready to implement concrate measures that will address the stability of onion prices within the local market. Onion is an agricultural product that can last as long as six months if it is stored properly (Anand 2016). The current problem of sharp decline in supply is primarily caused by lack of proper storage mechanisms among the producers.
The government, through the relevant ministries, should work closely with farmers and empower them towards mechanization of their production methods. These farmers should not rely on rainfall to prodice their products. They should use irrigation. The farmers should also refrigirate their products to prolong their products. The outcome of this strategy is that there will be steady supply of onions in the market. Farmers and consumers will benefit because trade in onions will not be inturupted. However, this strategy may have financial consequences to the government because it may be forced to spend when suporting the farmers to merchanize their production.
Conclusions
The onion market in Indian was significantly affected by the acute shortable in supply. Government made frantic measures to help deal within this problem. New policies were enacted to discourage export of onions and promote importations. The government also gave a directive for the suppliers of onion to stop hoarding the product. Search warrants were issued to help esure that there were no cases of hoarding because a section of the analysts claimed that the sharp rise in the onion price was created by artificial forces. However, it is clear from the above analysis that the most effective way of addressing the problem is to help farmers maitain steady supply of the product in the market.
Reference List
Ahmed, F 2014, Business environment: Indian and global perspectives, Prentice-Hall of India, New Delhi.
Anand, A 2016, One vs all: Narendra Modi – Pariah to Paragon, New Delhi, McGrow Hill.
Astyk, S 2012, Making home: Adapting our homes and lives to stay in place, New Society Publishers, Gabriola.
Dawe, D 2012, The rice crisis: Markets, policies and food security, McMillan Publishers, London.
Ghonim, W 2012, Revolution 2.0: The power of the people is greater than the people in power, Houghton Mifflin Harcourt, Boston.
Ghosh, N 2013, India’s agricultural marketing: Market reforms and emergence of new channels, Springer, New Delhi.
Goodwin, N, Harris, J, Nelson, J, Roach, B & Torras, M 2014, Microeconomics in context, Springer Publishers, New York.
Jha, R, Gaiha, R & Deolalikar, A 2014, Handbook on food: Demand, supply, sustainability and security, Springer, London.
Razzaque, M & Basnett, Y 2014, Regional integration in South Asia: Trends, challenges and prospects, McGraw Hill, New Delhi.
Tucker, I 2017, Economics for today, Cengage Learning Publishers, New York.