Managerial Economics

Case Study
India Shedding Tears over Onion Prices

Submitted By: Prince Singh Rajput Submitted To: Dr. Megha Jain
Enrollment Number: JI/2022-24/0103
Section: B
Q1) What factors affected the supply of onions during the period of
December 2010 to January 2011?
Ans - Onions are highly perishable, with a shelf life of one to six months. 1 month is the maximum for
Kharif crops, while 4-6 months is the maximum for Rabi crops. But in 2010 and 2011 it was extremely
difficult to maintain an adequate supply of onions for the following reasons:

Onions cannot be preserved for longer than six months due to their high perishability. Rabi crops,
which have a shelf life of four to six months, suffer enormous losses due to weight loss, bulb
sprouting, and decay.

 Lack of availability of substitutes - Onions do not have substitutes On occasion, great

cabbage and pumpkin Puri are used, but there are no close substitutes for onions permitted
by government regulations. Governments sometimes set minimum export prices to make
sure there is a steady supply of onions in the country and to keep the foreign exchange
stable.
 Lack of storage facilities - For a long time, merchants and farmers had been storing onions in
the conventional fashion, which led to spoilage and thus severely restricted availability.
 Natural Factors - Maharashtra That part of India, unfortunately, where the majority of the
country's onions are grown, has been hit hard by environmental factors.The carib onion
sapling was first affected by fungal diseases such as purple and knows and purple blouse.The
saplings were quickly infected by the disease due to the double deluge and the persistently
muggy weather. It impacted not only the state of Tamil Nadu, but also neighboring
Karnataka. Nearly half of the harvest was ruined.

Q2) What factors had affected the demand for onions? Which of these are
long-run or structural in nature and which are short-run?
Ans - The demand for onions is significantly influenced by the following factors:

 Increased consumption due to dietary modifications - With a rise in income, individuals

increased their consumption of protein-rich foods, with onion being a major component of
their diet.
 A rise in population that led to a rise in overall consumption.
 the rising income of consumers
 Festivals like makarsakranti, wedding, other family functions and religious functions occur
between December and January

 Short Run – Demand increases due to season.

 Long Run –
o Growth in population.
o Rising Incomes of People
o Change in eating habits
Q3) Consumers adjusted their demand for onions due to a substantial
increase in the price of onions. Many households that had been using two
onions a day reduced their consumption to one. Can this adjustment be
described as a movement along the demand curve or a shift in the demand
curve?
Ans - There has been a dramatic shift in onion prices, which has affected onion demand. Because of
the relationship between the price of a commodity and its demand, we can think of this change as a
shift in the demand curve. A shift in the demand curve occurs when demand for a commodity
changes due to factors other than price, such as consumer income, the price of related goods, and
so on.

Q4) Were speculative activities affecting the demand for or supply of

onions?
Ans - Due to speculative activities such as the hoarding of onions by intermediaries, the market is
experiencing a severe shortage of onions. As a result, there is a significant disparity between the
amount of demand and the amount of supply, resulting in a significant increase in onion prices.

Q5) What types of imperfections are observed in the onion market in

India?
Ans – Followings are the imperfection type that is being observed in the case study –

 Minimum Export Price is significantly higher than Minimum Support Price, resulting in an
increase in the number of exports. In 2008, the export of onions reached 1,670 thousand
tonnes, accounting for approximately 11% of total production, compared to 106 thousand
tonnes in 1968.
 Inadequate storage facilities. The nation requires an additional storage capacity of
approximately 12 lakh tonnes and the modernization of existing units with a capacity of 8
lakh tonnes (National Bank for Agriculture and Rural Development, 2000).

Q6) Why did government intervene in the onion market when onion prices
registered a sharp rise?
A common topic of conversation at the time was the dramatic rise in onion prices. It was a major
point of contention between the government and the opposition parties. After heated debates in
parliament, the government collapsed in 1980 after losing both the National and Delhi State
elections. Dr. Manmohan Singh, India's prime minister at the time, pushed for swift action in the face
of rising onion prices in 2011, but Mr. Sharad Pawar, India's agricultural minister, predicted it would
take three to four weeks to restore market equilibrium. Even more importantly, various activities like
hoarding can only be reduced with government intervention.
Q7) In Jan 2011, the government intervened in the onion market to bring
prices down to Rs. 35. Was this attempt to enforce a price ceiling or price
floor? How did it clear the market?
The government established a price floor in an effort to reduce onion prices. The government tasked
NAFED with acquiring or repurposing surplus onions and distributing them at a price of Rs. 35/kg,
well below market value. Despite this effort, some people have begun stockpiling onions rather than
purchasing them as needed. As a result, NAFED limited families' purchases of onions to no more
than 2 kilograms at a time.

Q8) From time to time, the government announces minimum export prices.
Do these constitute ceiling or floor prices? Who is expected to benefit from
these prices? Explain.
The minimum export prices are the floor prices. Producers will only receive this much in revenue
from exports. When the Minimum Export Prices are higher than the Minimum Support Prices, the
producers' attention turns to exports. As a result, producers may earn more than they would on the
domestic market, and the government may benefit from the rise in sales of foreign currencies.

Q9) Who pays the price for the government’s interventions in the onion
market?
The government's meddling in the onion market was expensive for both suppliers and buyers. The
government first raised the minimum export price for onions from $500 to $1200 to deter exports.
Second, the government had imposed high import duties on imports before the price spike in onions
to reduce market competition. While it's great that this policy is being put into place to help local
farmers, the increased demand and consequently higher price of imported onions is a major
downside.

Q10) Explain the impact of market forces and the government’s

interventions in the form of a price ceiling on the onion market using a
diagram.
Forces of competition have an effect on: The market supply of onions was impacted by the weather,
leading to a price increase. Second, a shortage has developed because of demographic shifts,
specifically the rising global population. Sellers can't get as much as they'd like for their goods
because of the price floor. When this happens, there is a huge increase in demand, and if equilibrium
prices are higher than the ceiling prices, there is a shortage and a gap in the supply. When there is
complete consensus between buyers and sellers on a price for the quantity wanted, we have
reached an equilibrium price. If the market is relatively price elastic and the government sets a
ceiling price far below the equilibrium point, then demand will skyrocket and the seller will be
unable to meet it.
Q11) Should the government subsidize onion prices in the event of a large
supply shortage or should it incur large investment expenditures to
construct scientific cold storage facilities to provide long-run stability in
onion prices?
Ans - In the event of a severe shortage, the government could temporarily subsidize onion prices,
but this would have a devastating impact on the country's financial stability. Although the initial
investment required to build scientific cold storage facilities is relatively high, the investment will pay
off in the long run by reducing the likelihood of supply shortages and guaranteeing a constant supply
of onions on the market.

Q12) What type of market structure do the participants in the onion

market face? Justify your answer.
Ans - Market players in India's onion industry faced monopolistic competition in 2010-2011.
Although there were many buyers and sellers in the market, the sellers held some sway over the
pricing. As a result of sellers stockpiling onions, the price of onions shot through the roof.

Q13) In your opinion what are the most critical factors that would justify
the decision to expand infrastructure for onion storage?
Ans - Onions will quickly perish if they are not stored properly. Rabi harvests of superior quality have
a storage life of four to six months, while Kharif harvests have a storage life of only one month. Due
to a lack of transport infrastructure, the majority of farmers bring their onions directly to market and
sell them within a month of harvest. During the months of April and May, farmers' incomes are
negatively affected by the market glut and resulting low prices. The traditional and unscientific
methods used by wholesalers to store onions cause a shortage in the following months, frustrating
both buyers and farmers. In order to maintain a sufficient supply of onions even during periods of
high demand, it is evident that the Indian market requires a proper storage facility.
Q14) Who will benefit the most from the scrapping of the minimum export
price for onions?
Getting rid of the minimum export price for onions is a good move for farmers, in my opinion,
because it will lead to less government oversight of international trade. Farmers will be able to make
optimal transactions when domestic market prices are lower than export prices.

Q15) In your view, what is needed to bring stability to the onion market
and better income for the farmers and traders?
In order to detect and stop hoarding, we must first establish organizations. Because wholesalers take
advantage of supply shortages to boost their profit margins, consumers and farmers are frequently
dissatisfied. By having these organizations in place, the frequency of these incidents will decrease.
Second, the government must construct sufficient storage facilities for onions in order to prevent
food waste and allow farmers to sell their crops whenever they choose, rather than just immediately
after harvest.