from the onion crisis
The Financial Express, India, February
Pradeep S Mehta
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
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
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
The author is the
Secretary General of CUTS International. Vikas Kathuriya of CUTS
contributed to this article.
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