Onion prices stir up trouble ahead of state elections

Onion prices have climbed sharply following a drought, a worry for the government as it heads into state elections that have been known to turn on the cost of the vegetable.

Prices have more than doubled in the last three months and no respite is in sight. Supplies remain tight as low rainfall has cut sowing and curtailed growth of individual bulbs.

Indians eat their way through 15 million tonnes of onions a year, using them as the base for traditional dishes such as biryani and bhaji and making them a hot political issue and a kick to inflation when the price rises.

"I don't understand how suddenly prices skyrocket. I have to buy at whatever price vendors are asking. I can't buy less just because prices are high," said Pooja Kadakia, 28, a housewife shopping in central Mumbai.

Onions cost Rs 35 per kg on Friday, compared with Rs 10 three months back. Further increases look likely, with food inflation running in double digits.

"Planting is down in all the major producing states. There is severe water scarcity in Maharashtra, Gujarat and Karnataka," Satish Bhonde, a director at the National Horticultural Research and Development Foundation, told Reuters.

Bhonde predicted a 10 percent drop in production from last year. India produced a record 17.5 million tonnes in 2011-12.

Relief could come with the new crop in October, but the government faces 10 state elections this year and needs a good summer monsoon. National elections are due next year.

The opposition Bharatiya Janata Party (BJP) will be sure to use rising prices against the Congress party-led government in the campaigns. In 1998, the BJP suffered heavy losses in a key state poll, a result widely blamed on high onion prices.

"The recent political history shows onion

price rises go against the ruling party," said Jaidev Dole, an analyst at MarathwadaUniversity in Maharashtra.

"The government is already unpopular ... the onion price rise may be the last straw that breaks the camel's back."

Battling Corruption, Inflation

The coalition government faced a string of corruption scandals last year and is battling to get the sluggish economy back on track while trying to control inflation, with food prices rising 13 percent year-on-year in December.

"Until the next onion crop arrives, prices will remain high. It will definitely have an adverse impact on inflation," said Madan Sabnavis, an economist at CARE Ratings.

The Congress-led government of Maharashtra, the top onion producer, is planning to act against hoarding and limit the amount of stock traders can hold, a state official said.

Traders are talking about a repeat of the 2011 export ban.

"The government can ban exports, start imports through state-run agencies. These measures can help a bit, but they can't pull down prices sharply," said a Mumbai-based exporter, who declined to be identified.

India, a key supplier to Asian and Gulf countries, exported 1.38 million tonnes in the first 10 months of the financial year from April 1, 2012, up 10.4 percent from a year earlier.

But the government may not have to intervene.

"Already exports are slowing due to higher prices. Pakistan is offering a steep discount compared to Indian quotes," the Mumbai exporter said.

What could make a difference would be to improve a creaky distribution system and storage. Post harvest losses account for nearly 30 percent for all vegetable production.

"Every year, improper handling and storage leads to large scale wastage. If we minimise the wastage, we can arrest price rise," said Bhonde of the Horticultural Foundation.

(Additional reporting by Shamik Paul)