Supply bottlenecks: In India, they're no small potatoes

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Buried in recent monthly data for wholesale prices in India, the wild gyrations of a humble vegetable tell the tale of an economy trapped in inflation by its own rigidities.

Back in December, after a bumper harvest of potatoes, furious farmers dumped tonnes of their crop on roads in protest over a crash in prices: four months later, the annual wholesale inflation rate of the potato is galloping at 53 per cent.

In street markets and on the handcarts of vegetable hawkers, the rise has been even steeper, a shock for millions of Indians who lay their tables each day with curries made of onions, tomatoes, lentils and 'aloo' or potatoes.

"We used to buy whatever vegetables we liked, but now we always have to check the prices," says Maninder Kaur, shopping with her family at a market in Jalandhar, in Punjab, where a kilogramme (2.2 lb) of potatoes that cost Rs 4-5 (8-10 U.S. cents) at the beginning of the year is now up to four times more expensive.

Meanwhile, onions are selling for about a fifth of the price they were at the end of last year and the price of tomatoes rose 33 per cent in April alone.

Such erratic prices for perishable goods are routine in India, partly because the majority of farms depend on the variable monsoon for rains.

However, they are also due to inadequate cold storage facilities and transport bottlenecks - that together cause up to 40 per cent of the country's food harvests to rot before they get to market - and a primitive distribution network in which many layers of middlemen take cuts, forcing prices higher.

"The storage and the distribution networks are not getting better, so whenever there is even a small supply shock or a small demand shock prices are going haywire," said Samiran Chakraborty, chief economist at Standard Chartered in Mumbai.

"It has become structural in nature, and this is precisely why everybody is calling for supply-side reforms."

Inflation was stuck close to a double-digit clip last year, forcing the central bank to keep monetary policy tight despite a slowdown in India's stellar economic growth.

Although headline inflation has eased to about 7 percent, the Reserve Bank of India rarely misses an opportunity to remind the government that interest rates have limited impact and only policies to tackle structural shackles on the flow of goods will knock inflation on the head.

MANY MIDDLEMEN

There was a brief chance last December to sort out the distribution system, which for agricultural goods is deeply fragmented by a decades-old marketing act that prevents large retailing companies from buying produce directly from farmers.

But, hemmed in by coalition allies with an aversion to free market reform, the government was forced into a U-turn on plans to open up the retail sector to global chains like Wal-Mart and Carrefour.

"The current marketing system has been in existence for more than 60 years, neither benefitting the farmer nor the consumer," said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a Delhi-based think tank.

"We need competition and an alternative business model ... where retailers can buy directly from the farmers and eliminate the middlemen," he said.

Take the 'aloo', which is passed from farmer to middleman after middleman and then to the final vendor like a hot potato, climbing in price at every stage.

In Punjab, a potato-growing state, big trading firms bought more than 80 per cent of the crop from farmers at the end of last year for Rs 3,500-4,000 a tonne and put their purchases in storage.

Then, in the new year, as supplies tightened, they drip-fed wholesale markets, auctioning their stock off at Rs 7,000-8,000 per tonne, a mark-up of more than 60 per cent after their transport and storage costs.

At this point 'commission agents' make a 5 per cent charge, and the government levies 4 per cent in auction tax. The auction buyers sell for a 20-30 per cent profit to intermediate wholesalers, who take a similar cut and pass the potatoes on to final vendors in the streets and neighbourhood shops.

At the end of the chain, potatoes that were sold at the farm gate for Rs 3-4 per kg reach the market at Rs 15-20.

The story is the same for many farm products. Neeraj Kumar, a commission agent in Jalandhar town, says garlic bought some 2,500 km (1,500 miles) away in Assam at Rs 3-4 per kg can soar to Rs 30 within hours of being unloaded.

On the potato fields outside Jalandhar, the mood is despondent. Farmers are bitter that they were forced to sell their produce to traders at rock-bottom prices.

"Last year when we stocked potatoes in cold stores, there were no buyers, forcing us to leave the harvest in fields. This time, we sold it early to traders, but now the prices have gone up three-fold," says farmer Avtar Singh.

"It is my fate. We do not know when prices are going to go up or fall."