Big Spike in Onion Prices Likely to Push India’s Inflation Rate to Highest Level in a Year
Wed, April 21, 2021

Big Spike in Onion Prices Likely to Push India’s Inflation Rate to Highest Level in a Year

The price of onions increased to as high as $1.13 or Rs 80 per kilo in September / Photo by Orapin Joyphuem

 

A more than 200 percent spike in India’s onion price is expected to push the country’s inflation rate to its highest level in more than a year by adding at least 30 basis points to last month’s headline inflation, reported India’s news provider The Print. Financial platform Investopedia defined basis point or “bips” as a unit of measure to describe the percentage change in the rate or value of a financial instrument. One basis point is equal to 0.01 percent.

While the increase in onion price will cause inflation, it may not stop the country’s central bank, the Reserve Bank of India, to deliver more rate cuts or to ease the country’s monetary policy. A rate cut means a reduction in the interest rate from which the banking and financial services statutory body State Bank of India and Indian multinational banking company ICICI Bank get money from. Once the rate goes down, banks can also give loans to individuals and industry at lower interest rates, explained Mayank Jain of Indian news site Scroll.in.

 

The onion crisis in India

In a survey conducted by Bloomberg, an international news agency headquartered in New York, it was revealed that the consumer prices in India probably increased to 3.8 percent last month from September 2018. Prices of tomatoes also increased after heavy rains reduced the supplies and damaged the crops. Prime Minister Narendra Modi’s administration has likewise banned onion exports in its attempt to fight inflation, but local farmers are affected in the process. Maharashtra-based third-generation onion exporter Danish Shah said via India Times that the onion problem of their country is not “so much” about managing the shortage but of managing the surplus. Another farmer, Krishna Hiraman Rawat, commented that they don’t get a fair deal because it’s always the retailer, trader, and the middleman that remain the “king.”

 

India is producing about 23.5 million tons of onion every year / Photo by zigzagmtart via 123rf

 

The effect of the onion crisis in India is felt in other countries too since India is one of the world’s largest onion exporters. Farmers are now unable to sell their produce and it just deteriorates in quality as the country is producing about 23.5 million tons of onion every year and consumes only 14 million tons. This is why export is important to make sure that farmers are earning and it helps maintain the prices too.

The price of onions increased to as high as $1.13 or Rs 80 per kilo in September compared to Rs 20 to Rs 25 in July. In New Delhi, tomato prices have likewise doubled to Rs 60 to Rs 70 per kilo. Mumbai-based stock and share market trading company Nirmal Bang Equities Pvt’s economist Teresa John commented that this is the reason why they believe the increase in online prices will contribute to the country’s headline inflation or the total inflation within an economy, including commodities.

 

Role of onions in the country’s inflation basket

Onions weigh 0.6 percent in India’s total inflation basket, which reflects the most commonly bought goods in an economy. They further contribute to about 10 percent of the vegetable basket.

Inflation is the increase in the level of prices of services and goods that people buy. The most popular indicator of inflation is the CPI or the Consumer Price Index. International financial institution the World Bank stated that CPI reflects the annual percentage change in the cost to the average consumer of purchasing the basket of goods and services that may be changed or fixed at particular intervals, like yearly. In its current statistics, World Bank detailed the most recent value and year of different countries and economies.

 

 

India’s most recent (2018) CPI was at 4.9. The Bolivarian Republic of Venezuela’s CPI in 2016 reached 254.9 followed by South Sudan with 187.9 CPI in 2017. In 2015, the Central African Republic’s CPI was at 37.1, the Syrian Arab Republic with 36.7 CPI in 2012 as its most recent year of CPI measure. 

 

Comparing consumer price index to consumer’s receipt

If many consumers check their receipts after they went to a grocery store to ensure that they purchased all the things they needed and the items they paid for, the government does the same thing to the economy or the whole country using the Consumer Price Index. If there is inflation, the CPI also increases for about six to eight months. On the other hand, if the CPI declines, it also means there is a steady decrease in the prices of services and goods or what economists refer to as deflation. Countries use the CPI to adjust the income payments for various groups of individuals, the reason why the Bureau of Labor Statistics in the US compiles and releases the CPI every month. 

The World Bank also details countries with the lowest CPI, including Comoros (2013: -4.3), Burundi (2018: -2.8), St. Kitts and Nevis (2018: -1.0), and the Cayman Islands (2016: -0.6).

 

 

In another statistics provided by database company Statista, India’s inflation rate from 2014 to 2024 are projected as follows:

2014: 5.8 percent
2015: 4.9 percent
2016: 4.5 percent
2017: 3.6 percent
2018: 3.48 percent
2019: 3.88 percent
2020: 4.25 percent
2021: 4.23 percent
2022: 4.18 percent
2023: 4.09 percent
2024: 3.99 percent