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HEC049

Volume 11
Issue 2
June 2013

India Shedding Tears over Onion Prices


Case prepared by Veena KESHAV PAILWAR 1, 2

In the upscale restaurants of Delhi and Mumbai, Chefs are eschewing the
onion, saying the price hike is eating up as much as 15 per cent of profits.
Mahendra Khairiya, chef at the upscale Kothi Mem restaurant in Delhi,
raised eyebrows across the city by announcing pumpkin puree would
replace onion gravy on his menu. Onion pickles have been scrapped
entirely.
Stephanie Nolen, 2011
Lasalgaon is angry. over 50 farmers began hurling abuse at the media
for making their lives miserable.
You people are responsible for this situation. Where were you when onion
prices were 500 per quintal? Nobody talked of prices when we were
struggling to recover our costs, they shouted in a mix of Marathi and
Hindi. Everyone is talking of high prices but no one wants to mention that
we have lost over half the crop and even at these high prices we will not
make money, another farmer politely told us.
M. Madhavan, 2011
With onion prices spiraling to 70-80 a kg, Prime Minister Manmohan
Singh Tuesday demanded immediate action to deal with the crisis, but
Agriculture Minister Sharad Pawar warned it would take two three weeks
for the prices to fall
The Bharatiya Janata Party attributed the rising price to the wrong
economic policies and bad governance
Pawar blamed the crisis on heavy rains which he said had destroyed crops,
particularly in Maharashtra
SME Times News Bureau, 2010

Veena Keshav Pailwar is Professor of Economics at the Institute of Management Technology, Nagpur, India.

The author is thankful to Ms. Tinu Agrawal, Mr. Sankalp Negi, Mr. Shailender Chauhan and Mr. Rishi Saluja for useful
comments on the case and the associated teaching notes.

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All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited.
The International Journal of Case Studies in Management is published on-line (www.hec.ca/en/case_centre/ijcsm), ISSN 1911-2599.
This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the
administrative situation presented. Deposited under number 9 80 2013 001 with the HEC Montral Case Centre, 3000, chemin de
la Cte-Sainte-Catherine, Montral (Qubec) Canada H3T 2A7.
This document is authorized for use only in Microeconomics by Prof Trupti Mishra, Shailesh J. Mehta School of Management from July 2016 to January 2017.

India Shedding Tears over Onion Prices

Hue and Cry over Onion Prices


During the period of December 2010 to January 2011, it seemed as if all of India was shedding
tears over onion prices, which had suddenly registered a sharp rise. The average price, which was
running around Rs 30 in the first week of December 2010, had shot to above Rs 50 by the fourth
week of December. Some centres even recorded a much higher price, with a peak of around
Rs 85 in Gurgaon (Exhibit 1), a city in Haryana state in India. Consumers across all income strata
reduced their onion consumption. For some, in spite of a reduction in their consumption, the
expenditure on onions almost doubled. Even restaurant owners substituted onions with shredded
cabbage, carrots and pumpkin in their dishes. There was a hue and cry over the onion prices
across the country, with consumer forums blaming the government for not taking action to curb
onion prices. The opposition parties in the parliament also blamed the government for pursuing
the wrong economic policies. The government suspected hoarding by the traders to be the main
culprit behind the soaring prices and warned them to release onions from their stocks. It imposed
a ceiling on stock holding and issued a search order. The traders argued, on the contrary, that a
natural supply-demand gap was the main reason for the soaring prices. There was total chaos,
with all the stakeholders blaming each other for the situation and with no clear explanation of
what was wrong. Was the shortage due to a natural supply shock? Was it a result of an artificially
created shortage? Was it an outcome of wrong government policies? Or was it simply the result
of changes in demand conditions? The government and business analysts were wondering not
only about the causes of the sharp price rise, but also about the appropriate interventions and
policy changes required to stabilize the prices.

Onion Prices
Supply side of the market
India is the second largest producer of onions in the world (Table 1). Maharashtra state is the
largest producer of onions in the country, accounting for 41% of the area harvested and 38% of
production (Table 2). Within Maharashtra, Nashik district contributes 35 to 40% of the states
production. Lasalgaon in Nashik is the biggest onion market in the country; hence, this market
largely determines the prices in the country. The other major onion-producing states are
Karnataka, Gujarat, Bihar, Madhya Pradesh and Rajasthan.
Table 1: Onion Production, Area and Yield: Top 10 Countries in the World in 2009
Country

Production (tonnes)

Area Harvested (ha)

Yield (hg/ha)

China

21,046,969

947,611

222,106

India

13,900,000

846,909

164,126

USA

3,400,560

60,120

565,629

Turkey

1,849,580

65,000

284,551

Egypt

1,800,000

54,000

333,333

Pakistan

1,704,100

129,600

131,489

Russian Federation

1,601,550

85,700

186,879

Iran (Islamic Republic of)

1,512,150

47,450

318,683

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India Shedding Tears over Onion Prices

Country

Production (tonnes)

Area Harvested (ha)

Yield (hg/ha)

Brazil

1,511,850

66,013

229,023

Netherlands

1,269,000

26,000

488,077

Spain
1,263,400
23,600
535,339
Source: FAO. FAOSTAT-Agriculture, as on 23/9/2011 (http://faostat.fao.org/site/567/default.aspx#ancor)

Table 2: State-Wise Area and Production Data for Onions in 2011-12


State

Area

Production

Yield

Share in Total Production

(000 ha)
54.9

(000 MT)
732.3

(Ton/ha)
13.3

%
4.84

Bihar

54.4

1,138.50

20.9

7.52

Gujarat

57.3

1,394.60

24.3

9.21

Haryana

23.2

476.5

20.5

3.15

Jharkhand

17.2

364.1

21.2

2.41

Karnataka

130

1,756.70

13.6

11.61

Madhya Pradesh

64.1

985.1

15.4

6.51

Maharashtra

387

5,823.50

15.1

38.48

17

340

20

2.25

48.6

900

18.5

5.95

Andhra Pradesh

Others
Rajasthan
Tamil Nadu

37

556.5

15

3.68

Uttar Pradesh

23.6

370.8

15.7

2.45

West Bengal

21.2

297

14

1.96

935
15,135.60
Total
Source: National Horticulture Research and Development
(http://www.nhrdf.com/ContentPage.asp?DataCode=202)

Foundation,

100.00
Database, as on

25/9/2011

There are three main seasons for onion production: kharif (monsoon), late kharif and rabi (winter)
(Table 3). The rabi crop is the major crop, contributing 70% of total onion production. Some of
the rabi varieties have excellent storage quality of about four to six months.
Table 3: Onion Seasons in India
States/Regions

Time of
Time of
Sowing
Transplanting
Maharashtra and
1.Kharif
May-June
July-Aug.
some parts of Gujarat
2.Early Rabi
Aug.-Sept.
Sept.-Oct.
3.Rabi
Oct.-Nov.
Dec.-Jan
Tamilnadu/Karnataka
1.Early Kharif
March-April April-May
and AP
2.Kharif
May-June
July-Aug.
3.Rabi
Sept.-Oct.
Nov.-Dec.
Rajasthan/Haryana/Pu
1.Kharif
May-June
July-Aug.
njab/UP and Bihar
2.Rabi
Oct.-Nov.
Dec.-Jan.
West Bengal & Orissa 1.Kharif
June-July
Aug.-Sept.
2.Late Kharif
Aug.-Sept.
Oct.-Dec.
Hills
1.Rabi
Sept.-Oct.
Oct.-Nov.
2. Summer (long day type)
Nov.-Dec.
Feb.-March
Source: National Horticulture Research and Development Foundation (2011), Database,
(http://www.nhrdf.com/ContentPage.asp?DataCode=202).

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Seasons

Time of
Harvesting
Sept.-Dec.
Jan.-March
April-May
July-Aug.
Oct.-Nov.
March-April
Nov.-Dec.
May-June
Nov.-Dec.
Feb.-March
June-July
Aug.-Oct.
as on 25/9/2011

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India Shedding Tears over Onion Prices

Onions are a commercial crop. The estimated cost of onion cultivation varies from Rs 79,590 per
ha to Rs 87,900 per ha (Table 4) (for the international equivalence of Indian units of
measurement, see Exhibit 2), which is comparatively smaller than the cost of cultivating other
crops. Apart from the suitability of soil for onion production, the lower cost of cultivation also
attracts many small and medium farmers to this crop.
Table 4: Cost of Production of Onions During 2011-12 in Maharashtra (Cost Rs/ha)
Operations
1. Land
2. Seed Cost
3. Nursery Raising
4. Land Preparation
5. Transplanting
6. Irrigation
7. Manures and
Fertilisers
8. Weeding and
Hoeing
9. Plant Protection
10. Harvesting, Curing,
Sorting, Grading
and Packing
11. Transportation
12. Supervisory Charges
13. Overhead Charges
14. Total (Rs)
15. Bank interest @
10% p.a. for 6
months
16. Total cost (Rs)
17. Average Yield
(Quintal)
18. Cost per Quintal
(Rs)

Kharif

Late Kharif

10000
4800
3500
7000
8000
4000
16000

10000
4800
3500
7000
8000
4000
17500

Rabi

10000
4800
3500
7000
8000
4000
17500

6000

6000

6000

4000
7000

4000
8000

4000
8500

3000
1500
1000
75800
3790

3500
1500
1000
80800
4040

4000
1500
1000
83800
4190

79590
160

84840
245

87990
250

497

346

352

Source: National Horticulture Research and Development Foundation (2012), Market Intelligence System: Baseline
Data for Potato and Onions, April,
(http://www.sfacindia.com/Docs/Onion%20&%20Potato%20Baseline%20Report.pdf)

In spite of India being a major producer of onions, its productivity is one of the lowest amongst
the major growing countries. Apart from lower yield, the crop is also subject to excessive postharvest storage losses in the event of adverse weather conditions, lack of dormancy (inactive
state) in bulbs, and pest and disease infestation, which affect the economic viability of the crop.

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Storage of onions and supply


Unlike wheat, rice and other food grains, onions are a highly perishable commodity; hence, they
cannot be stored for long periods. Also, the storability of onions depends on their variety and the
harvesting period. Kharif crops cannot be stored for more than a month, whereas rabi crops can
be stored for four to six months. However, conventional methods of onion storage can result in
large losses, even in rabi crops, due to weight loss, sprouting and rotting of bulbs. To overcome
these losses, the country requires scientifically constructed cold storage facilities, which, as per
the Maharashtra State Agricultural Marketing Board (online), can cost around Rs 6,000/- per mt
storage capacity (excluding the cost of land). The country requires an additional storage capacity
of around 12 lakh tonnes and modernization of 8 lakh tonnes capacity of existing units (National
Bank for Agriculture and Rural Development, 2000).
Because of the lack of proper storage facilities, most farmers bring onions directly to the market
and unload their entire stock within a month of harvest. As a consequence of the glut in the
market, the prices are very low in the months of April and May (Figure 1), which adversely
affects the earnings of farmers. Wholesale traders store onions, but in a traditional and
unscientific manner; hence, the supply becomes limited in the subsequent months and prices rise
rapidly and steeply, leading to dissatisfaction among consumers as well as farmers. Consumers
feel the pinch of the high prices because they are accustomed to using the bulbs on a daily basis,
whereas the farmers agony is due to poor yield, lack of storage facilities and low prices.
Sometimes, they are not able to recover even the cost of cultivation. In the absence of proper
storage facilities, prices fluctuate widely, which creates uncertainty in the environment and
hampers cultivation decisions in the ensuing onion-growing season.
Figure 1: Month-Wise Market Arrivals and Prices (in Rs) of Onions for All Months in
Lasalgaon (Nashik) in Maharashtra

Source: Based on the data available from National Horticulture Research and Development Foundation, Database, as
on 25/09/2011 (http://www.nhrdf.com/ContentPage.asp?ResultCode=301)

Demand side of the market


Except for a few communities, onions are used in the day-to-day cooking of both the poor and the
rich across the country. Apart from households, restaurants are also major users of this bulb. It is
used not only raw, but also in processed form fried, boiled, baked, dried and powdered as well
as in curries, soups and pickles.
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India Shedding Tears over Onion Prices

Onions also have numerous health benefits and healing properties and are widely used in the
manufacture of medicines for dropsy, kidney, heart, liver, diabetes, tuberculosis, colic, scurvy,
rheumatic pain and other inflammatory diseases.
However, most Indians use onions not because of their inherent health benefits, but because they
are a condiment that adds taste to the food to which they are accustomed. Also, onions are usually
plentiful and inexpensive, even poor people can normally afford them. Though some consumers
substitute onions with grated cabbage or pumpkin puree during periods of scarcity, there are not
many close substitutes for onions. A small change in the price, therefore, does not have a large
effect on the quantity demand. Considered to be almost an essential item, it takes a very big
change in the price to affect the consumption of onions.
Government policies and regulation of the onion market
In India, in general, the government regulates food grains and vegetable markets by fixing
minimum support prices, minimum export prices, tariffs on imports and quantitative restrictions.
As far as the onion market is concerned, the government pursues the following policies:

First, the government provides the minimum support price to farmers to augment the
production and supply of various agricultural products, and to support their income.
However, as onions cannot be stored for long periods and their storage requires a special
type of structure and huge area, it is not possible for the government to purchase, store
and market onions. Therefore, the government does not provide support prices for onions.
The lack of storage facilities results in large fluctuations in the market price of onions.

Second, the government regulates the export of onions by fixing the minimum export
price. India is a major producer of onions; hence, supply from India can influence world
onion prices. In a situation of normal supply, onions are available at a cheap price. If
exported at this price in the world market, they are not very remunerative for Indian
farmers. Therefore, the idea behind fixing the minimum export price is to provide
lucrative prices to the farmers, to encourage the export of onions and to maximize foreign
exchange earnings for the country. Keeping these objectives in mind, in a normal supply
situation, the minimum export price is fixed above the market clearing price in the
domestic market, but below that prevailing in the world market. The minimum export
price, however, affects the supply in the domestic market. An increase in export prices
(above the world market price) makes the exports more expensive in the international
market, thus reducing demand for exported onions in the global market. However, this
helps increase the supply in the domestic market. The reverse holds true when the
minimum export price is lowered. To ensure a smooth domestic supply and to moderate
fluctuations in domestic onion prices, the minimum export price is fine-tuned every
month, taking into account quality, crop prospects, market trends, expenses involved,
freight charges, etc.

Third, India is a major producer of onions in the world. To prevent a glut in the market
and to ensure fair prices to onion farmers, the government tries to restrict the import of
onions by imposing an import duty.

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India Shedding Tears over Onion Prices

Fourth, in extreme situations, the government can impose quantitative restrictions and
even completely ban the export and import of onions.

Fifth, in India, the inter-state sale of agricultural products, including onions, is restricted
by various state-level regulations and taxes to ensure food security in the exporting states
and to avoid excessive competition in the importing states. Such restrictions, in spite of
the removal of a ban on the inter-state movement of agricultural commodities, fragment
the markets, result in black marketing and hoarding, boost the commission of middlemen
and make prices highly volatile.

What Caused Soaring Onion Prices?


In general, the overall price level in India hovers around Rs 15 per kg. However, the country also
experiences seasonal fluctuations in prices. Onion prices generally run high in the lean months of
December-January and dip sharply in April and May with the arrival of the rabi crop. But the
period of December 2010 to January 2011 saw an unprecedented rise in the wholesale and retail
prices, which were much higher than those registered in the same period in 2009-10 (Figures 1
and 2).
Was it a supply shock?
Various natural factors affected the kharif crop adversely in Maharashtra, which is the major
onion-growing region in the country. Fungal diseases like purple anthracnose and purple blotch
affected the kharif onion sapling (John, 2011). The situation further deteriorated with an erratic
and extended monsoon, which caused waterlogging in the flat crop beds and spread the fungal
infections among the saplings rapidly. The heavy downpours and prolonged humid climate also
made the spraying of pesticides ineffective. The untimely heavy showers in southern India also
affected the onion crop in Karnataka and Tamil Nadu states. As per one estimate, overall, 40% of
the crop was damaged (Madhavan, 2011).
The impact of natural factors on supply could have been mitigated, however, had there been
sufficient onion reserves available in the country. But since it was lacking proper storage
facilities, the country did not have enough of the durable rabi crop in storage. Whatever stocks
the states reported were primarily from the kharif crop, which was not sufficient to meet even
normal demand levels.
Was it a demand shock?
Some analysts argue that India is one of the worlds fastest growing countries, with an average
GDP growth rate of 8 to 9%. Improvements in income levels have been causing changes in
dietary habits in favour of protein-rich foods, fruits, vegetables, pulses, milk, etc. (Chand et al.,
2011). Dietary changes, along with population growth, have led to increased consumption of
various agricultural products, including onions, and have caused continuous price increases.
Apart from the overall increasing trend in the demand for onions, there was also a seasonal
increase in demand, which caused a sharp spike in onion prices. December-January is wedding

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India Shedding Tears over Onion Prices

season in India. Major festivals, such as Christmas, New Years Eve, Makar Sankranti, etc., fall
in these months. Families and friends visit each other during these festivities in India and
celebrate the events with special meals, increasing the demand for onions and other vegetables
during this period.
Was it speculation?
Traders did take advantage of the apparent mismatch of demand and supply. The demand-supply
gap, which would have been minor, was widened by speculative activities and hoarding by
intermediaries. The widening of the gap accentuated the deviation between wholesale and retail
prices (Figure 2) and worsened the situation manifold in the market place.
Figure 2: Wholesale and Retail Onion Prices (in Rs) in December 2009 and 2010

Source: Based on the data available from the Ministry of Consumer Affairs, Food and Public Distribution, Price
Monitoring Cell, 2011, http://fcainfoweb.nic.in/Prices_Application/daily_prices/san_interface_daily.asp.

Expectations also played an important role on the demand front. In anticipation of a further rise in
the price of onions, consumers also tried to safeguard their interest by demanding more onions
than their normal requirement and storing them. Those families that usually used only 2 kg of
onions in a month bought 5 kg in anticipation of additional increases in onion prices, further
accentuating the shortage of onions in the market.
Was it government policy?
The opposition parties as well as analysts blamed the supply shortage on the governments
economic policies. They argued that, in its zeal to promote onion exports (India is the largest
exporter (Table 5)), the government had ignored the rising domestic demand. India used to export
just 106 thousand tonnes of onions 50 years ago. With the emergence of the WTO in 1995, and
after the removal of quantitative restrictions, the export of onions increased rapidly, reaching
1,670 thousand tonnes in 2008 (Figure 3), which accounted for around 12% of total production.

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India Shedding Tears over Onion Prices

Table 5: Onion Exports: Quantity and Value: Top 10 Exporters in the World in 2008
Countries

Quantity

Countries

Value ($)

India

1670720

India

422832

Netherlands

1100050

Netherlands

375646

China

545310

Mexico

301007

United States of America

320773

United States of America

182507

Mexico

279989

China

133026

Spain

254773

Spain

96878

Turkey

210936

Argentina

77502

Argentina

202597

Poland

66706

Poland

141672

Egypt

41559

Egypt
103321 Italy
40749
Source: FAO, FAOSTAT-TradeSTAT, as on 24/9/2011 (http://faostat.fao.org/site/535/default.aspx#ancor)

Figure 3: Trend in Export of Onions

Source: Based on the data available from FAO (2011), FAOSTAT-Agriculture, as on 24/9/2011,
http://faostat.fao.org/site/342/default.aspx.

Apart from the removal of quantitative restrictions, the policy on minimum export prices had
promoted export value and volume. The minimum support prices had usually been kept low in
comparison to international prices to make Indian exports competitive and enhance the demand
for exported onions. However, since these prices were higher than those in the domestic market,
the effect of this policy had been to reduce the supply of onions in the domestic market.
The government was also criticized for delayed policy responses. The outbreak of the fatal crop
diseases was reported in the kharif season and it was expected that the yield would be low and
prices would soar. Anticipating this, the minimum export prices should have been sharply
increased as soon as it became apparent that there would be a supply shortage. But the
government response on this front was very late in coming. Critics of the governments policy
argued that the government could have averted the sharp supply shortage by restricting exports
and resorting to imports at a much earlier stage and by building up buffer stocks on the bumper
rabi crop (Mehta, 2011 and John, 2011).

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India Shedding Tears over Onion Prices

Government Management of the Crisis and Its Impact


To the extent that they are part of even the poorest persons meal, onions have played an
important role in Indian politics. Hence, a sharp rise in onion prices is considered to be a
politically sensitive issue. The Indian national election of 1980 and state elections in Delhi and
Rajasthan in 1998 came to be known as onion elections (Kumar, 2011) because the runaway
onion prices in those years brought down the government in power at the time.
The soaring onion prices, which were reducing home cooks and restaurateurs alike to tears and
threatening to fuel public ire over runaway food prices, compelled the government to respond
forcefully by implementing various measures on December 21, 2010. The immediate response of
the government was to discourage exports by asking the National Agricultural Cooperative
Marketing Federation (NAFED), responsible for marketing (including exports and imports) of
agricultural products for the benefit of farmers in the country, and other agencies to voluntarily
suspend onion exports. The government also more than doubled the minimum export prices to
$1,200 a ton from $500 a ton, making onions more expensive in the international market and thus
discouraging exports. The government also attempted to augment supply by eliminating the
import duty on onions, which was 5% at that time, and by importing shipments of onions from
neighbouring Pakistan.
However, the prices ruled steady. Finally, to bring prices down to a desirable level, the
government intervened directly in the market by making the NAFED supply onions at the price
of Rs 35, far below the market prices at the time. However, the huge demand persisted at this
price and the government ended up rationing onions by limiting the supply to 2 kg per person at
the time of distribution by the NAFED.
As the supply of onions at this price was below the cost of procurement, the government agreed
to compensate the NAFED for 30% of the losses it was estimated to have incurred by selling
onions at a cheaper rate (PTI, 2011), implying an increasing burden on taxpayers. The
government released Rs 15 crore to NAFED to subsidize onions and to help tide over the capital
city of Delhi during the crisis (Bhatnagar, 2011).

What Is Needed?
Business analysts questioned whether the government should leave the matter of export and
domestic price fluctuations to the natural forces of demand and supply, and intervene in the
market only in the event of large volatility, by subsidizing onions to consumers. Would the
traders and farmers benefit from such a policy? Or, should the government scale up storage
facilities by investing heavily in infrastructure to provide long-run price stability? Such an
approach would, however, drive up the governments already high deficit, the burden of which
would fall on everyone, including consumers, traders and farmers, in the form of higher inflation.

2013-06-18

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India Shedding Tears over Onion Prices

Exhibit 1
Map of India

Source: http://www.mapsofindia.com/maps/cities/india-map-with-cities.html

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India Shedding Tears over Onion Prices

Exhibit 2
Indian Units of Measurement and their Equivalence
Indian Units
1 lakh
10 lakh
1 crore
10 crore
100 crore
1 Acre

International Equivalent
100 thousand
1 million
10 million
100 million
1 billion
4,840 sq yard
= 4,046.8 sq meters
= 43,560 sq feet
= 0.4047 hectare
= 20 kanal

1 hectare (h)

2.4711 acre
= 10,000 sq metre
2.20462262185 lb
1,000,000 gms
=1.102 short tons
0.1 kg

1 kilogram (kg)
1 metric ton (mt)
Hectogram (hg)

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India Shedding Tears over Onion Prices

Bibliography
BARAKADE, A.J. (2011). Economics of Rabi Onion Marketing in Satara District: Problems
and Prospects, India Streams Research Journal, Vol. 1, No. 9, pp. 1-4,
http://www.isrj.net/Sep/2011/Sep/Barakede.pdf.
BHATNAGAR, Gaurav Vivek (2011). Government Subsidy for Onions, The Hindu, January 8,
http://www.thehindu.com/todays-paper/tp-national/tp-newdelhi/article1064649.ece.
CHAND, Ramesh, P. SHINOJ, Ashok GULATI and Kavery GANGULY (2011). Managing
Food Inflation in India: Reforms and Policy Options, ICAR Policy Brief, February,
http://www.ncap.res.in/upload_files/policy_brief/pb35.pdf.
JOHN, Ann Mary (2011). The Onion Price Rise: What Actually Made Us Cry? Macroscan: An
Alternative Economics Webcentre, 21 February,
http://www.macroscan.org/cur/feb11/cur210211Onion_Price.htm.
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India Shedding Tears over Onion Prices

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