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Secret handshakes in India fuel fastest inflation in Asia

At Mumbai’s Vashi market, middleman Nitin Parakh put a towel over his hand last month as he began an onion auction. Buyers drifting through piles of onions placed bids by reaching under the towel and squeezing his hand: The thumb, middle, ring and pinkie fingers each count for Rs10 ($0.16), while the index finger has a value of Rs100.

India’s top political parties are taking aim at a six-decade old practice of collusion among traders at produce markets that policy makers say helps fuel Asia’s highest inflation.

At Mumbai’s Vashi market, middleman Nitin Parakh put a towel over his hand last month as he began an onion auction. Buyers drifting through piles of onions placed bids by reaching under the towel and squeezing his hand: The thumb, middle, ring and pinkie fingers each count for Rs10 ($0.16), while the index finger has a value of Rs100.

“We know secret bidding is illegal and we should actually do open auctions,” said Parakh, one of about 450 traders licenced to sell onions and potatoes at Vashi, the largest wholesale market in Mumbai, a city of about 18 million people. “This practice has been in vogue for many, many years.”

The ruling Congress party put trader rackets on its priority list after surging prices for onions — an Indian diet staple — contributed to local-election losses late last year. With a nationwide ballot looming next month, the opposition Bharatiya Janata Party also is pledging to chip away at the middleman’s margin.

“Secret bidding fuels inflation as there is collusion between the middlemen and wholesalers: They pay lower prices to farmers and sell it at higher price to retailers,” said A.V. Manjunatha, who co-authored a report for the government on onion price manipulation in 2012. “The problems are known, and the solutions are also known: you need to have political will to bring about the changes.”

Rate increases

The central bank in January cited agriculture market cartels for exacerbating price spikes as Governor Raghuram Rajan raised the benchmark repurchase rate to eight per cent. India’s consumer-price inflation of 8.1 per cent is the fastest among 18 Asia-Pacific economies tracked by Bloomberg.

Rajan will leave the key rate unchanged at an April 1 policy review, according to 18 of 19 analysts in a Bloomberg News survey. One predicted an increase to 8.25 per cent.

The rupee rose to a seven-month high on Tuesday, climbing as much as 0.6 per cent to 60.4275 in Mumbai, prices from local banks compiled by Bloomberg show. The S&P BSE Sensex index dropped 0.1 per cent as of 12:55 p.m. local time. The yield on the 10-year government bond due November 2023 was little changed at 8.79 per cent.

A central bank panel in January called for consumer-price gains to slow to six per cent by January 2016. Food prices make up 50 per cent of the CPI basket, compared with 14 per cent in the US and 24 per cent in Brazil.

Direct purchases

Prime Minister Manmohan Singh’s ruling Congress party targeted the rackets in December after it lost four of five state elections to the BJP following a jump in onion prices. Government officials accused middlemen of hoarding as prices quadrupled while heavy rains crimped supplies. Rahul Gandhi, who is leading the party’s bid to extend its decade-long rule after Singh said he wouldn’t seek a third term, ordered rule changes to enable buyers to directly purchase from farmers in 12 states under his control. Voting starts on April 7 and results will be known on May 16.

The BJP, which leads in opinion polls, will change the current system to benefit farmers more than middlemen, spokesman Prakash Javadekar said by phone. Narendra Modi, the party’s prime minister candidate, said in January he’d establish a real- time database to track agriculture prices.

“We need to remove all the geographical restrictions and make the system more transparent so that the farmer gets his due,” Javadekar said.

The current system dates back to the 1950s, when state governments — which have constitutional powers to regulate farming — sought to prevent farmers in remote areas from exploitation by setting up markets with licenced traders and transparent sales.

Over time, the licencing system turned into a monopoly in many states, with traders organising to prevent new entrants and stifle competition, according to an Agriculture Ministry report published last year.

“There are at least three to four stages before the final produce reaches the consumers,” said Ashok Gulati, a former chairman of the Commission for Agriculture Costs and Prices, a body that recommends minimum guaranteed farm prices to the government. “There is rent-seeking happening at every stage.”