GOVERNMENT STRATEGIES ON ONION UNWORKABLE

GOVERNMENT STRATEGIES ON ONION UNWORKABLE



BUSINESS LINE

25.07.2014

ONION IMPORTS AND MEP ON EXPORT UNWORKABLE STRATEGIES

(Pakistan banning exports not ruled out, leading to frustration of contracts.)

Inter-ministerial consultations/ideas for import of about one lakh or more tons of onions through Government undertakings/PSUs and decision to hike Minimum Export prices (MEP) at $500fob/mt to restrict export, are not the panacea for cooling price spurt of tuber. It is easy to say that “we can import” but nitty- gritty of process of import may not be workable beyond a few thousand tons.

Since Government may subsidize imports, private trade will stay aloof from taking any initiative. Thus PSUs may be fronted with mandate to subsidise by 50%, or in simple terms, will be asked to sell at a huge loss.

Imports

As per Government guidelines, PSUs (STC/MMTC/PEC) must undertake due diligence before initiating any commercial operation.  No PSU has a registered/pre- qualified list of performing parties who can efficiently deliver onions within short span of 45-60days. Though the country of origin too remains unidentified, one can surmise that origination could be predominantly from Pakistan. China could be another country but logistically difficult to handle.    

Dealing directly with little known and never tried Pakistani/Chinese sellers may not be commercially convenient. The option then devolves upon Dubai or Singapore or UK /EU based traders who become intermediaries –middle men – in import transactions at extra cost. Government tenders require 21 day notice period for submission of bids. Business can be finalised with the lowest L1 party. Finalising with L2, L3.. parties may require special dispensation from vigilance.  Export from China can take place only in “Reefer containers” or refrigerated containers—which do not ply on India-China route. Their availability too is scarce. These are procedural issues.

Then there are some other concerns on bidding/pricing/implementation. Assuming a tender for import of 25000mt is notified—bids received may not be for more than 500 to 1000mts from each bidder. Reason is simple-- Indian demand will spike prices of onion in Pakistan or China. Foreign sellers will like to limit their risk exposure. Against a single tender, contracting of not more 2000-3000 mts may be feasible and that too if procurement guidelines are relaxed.  

A simple google search reveals price of Pakistani onions varying between $400-$700 fob, depending upon quality.  Should cif cost of imported onion be say $500/mt at Indian ports or Rs 30000/mt, then cost at mandi may be minimum Rs 36000/mt  or Rs 36/kg after accounting for 20% as storage/ financing/ internal movement/shortages/ rotting etc.   At 50% subsidy, wholesale price would be Rs 18/kg which involves subsidy of Rs 180 crore for one lakh ton. Has this subsidy been approved?? Only then retail price could be Rs 20-22 pkg.

 If frequent bidding is called for, local prices in Pakistan will be hyper inflationary, escalating to say about Rs 50-60 pkg or $1000/mt or more.  These developments may compel Pakistani Government to prohibit exports of tuber. All concluded contracts will stand frustrated under Force Majeure.  Neither any arrival of onions nor any claim can be realized.  

NAFED’s tenders notified on 19^th July intend to engage private/ interested parties—middlemen-- having “adequate experience in importing onions”— without specifying what adequate experience is. Traders will import in the name of NAFED and then sell/deliver to them (NAFED) in Indian rupees with condition of receiving payments after 7/15days. This is indicative of NAFED ignorant of reputed overseas suppliers of onions and perhaps due to non availability of letter of credit limits for international contracting. The transaction may be construed as if payment to private party is to be made after realization of sales proceeds by NAFED. Any dispute between private party and NAFED will be arbitrated solely by Managing Director of NAFED—a one sided privilege. Given volatility in onion prices internationally/ domestically, uncertainty on timing of disbursement of subsidy by the Government and financial fragility of the deal, private trade is unlikely to trade with NAFED on such a high risk profile. These tenders may thus remain a paper formality.

MEP and Ban

Minimum Export Price (MEP) facilitates shady deals. The parties to the deal may be situated in India and UAE who may be sister companies or such associates companies who conduct trade with prior understanding. Excess payment can be transferred through grey or illicit channels to the buyers for ensuring remittance to Indian exporter or black/unaccounted funds stashed abroad can be formalised through banking channels. It is inconceivable as to why Governments knowingly or unknowingly become complicit in such questionable transactions.

Since Governments are seldom logical and rational, but more political—they  continue to ignore market dynamics and pursue interventionist policies of hitting at the middlemen, subsidization—buying at high prices and selling below market prices-- banning exports etc.  with nil results.  Onion problem is seasonal.  Onion prices have to be tackled by the market. Policymakers can never capture millions of options under which market operates.

Sharad pawar rightly commented in October 2013 – “Government does not control onions and does not sell onions. Prices are determined by the market." His  thought process can be a gentle reminder