The volatility in prices of onion has again exposed the structural gaps in India's food supply chain. Prices continue to be guided by sentiments that prompt hoarding and are not based on the fundamentals of demand and supply.

Onion prices firmed up due to late arrival of the seasonal monsoon and projections of below-normal rainfall this year even though the country is estimated to have harvested a record crop of 19 million tonnes last year. Retail onion prices rose from Rs 25 to Rs 30 a kg in major markets in the first half of June.

This prompted the new government of the Bharatiya Janata Party-led National Democratic Alliance (NDA) to impose a minimum export price of $300 per tonne on the vegetable to discourage shipments and improve local supply. This is one of the several inflation-control steps the government announced on June 17, a day after data showed higher food prices pushed the wholesale price index to 6.01 per cent in May from 5.20 per cent in April.

Onion is a politically sensitive commodity and a rise in its prices in the past has led to the fall of state governments. Although output is higher than annual demand of about 15 million tonnes, a network of cartels involving wholesale traders and commission agents seem to manipulate prices. A Competition Commission of India report, in 2012, had also concluded that cartels and hoarding influence onion price.

R.P. Gupta, Director at the Nashik-based National Horticultural Research and Development Foundation, says the country had nearly 4 million tonnes of onion around mid-June and there was no reason for a price rise. He adds that the stock is enough to last more than three months but there could be a concern if monsoon rainfall is erratic.

The India Meteorological Department projects rainfall to be 93 per cent of the 50-year average. The monsoon hit the country's shores on June 6, a little late compared to the normal date of June 1. The good news is that the gap between normal and actual monsoon is narrowing and has come down from 44 per cent in early June to 36 per cent at the end of the third week. Accordingly, sowing of kharif crops such as paddy, pulses and oilseeds is picking up. The onion crop can be harvested from July if rains improve. Another area of comfort is the high grain stock - more than 41 million tonnes of wheat and 28 million tonnes of rice - in warehouses as of June 1.

The government has also decided to release more rice in the open market and crack down on hoarders to keep prices in check. States have been advised to delist trade of fruits and vegetables through the Agriculture Produce Market Committees so that farmers are free to sell in the open market at lower prices. The Centre also decided to provide states a Line of Credit to import pulses in case of a shortage. Prime Minister Narendra Modi has also stressed on the need to improve pulses productivity. "The situation is not alarming and the price rise is only marginal. We are acting to discourage hoarding and prevent middlemen from taking advantage," Finance Minister Arun Jaitley told reporters on June 17.

States are also waking up to the need to control food prices, and these are not just the states ruled by the NDA. The Uttar Pradesh government of Samajwadi Party has asked District Magistrates in the state to act against hoarders, Chief Secretary Alok Ranjan told Business Today.

Rising prices of milk over the past couple of years is another area of worry but the dairy industry promises a largely steady outlook for the next few months. "Prices are unlikely to rise more than the average food inflation rate," says R.S. Sodhi, Managing Director at Gujarat Cooperative Milk Marketing Federation, which owns the Amul brand.

But not everyone is convinced that the recent measures will make any substantial difference in the long term. T. Nanda Kumar, Chairman of the National Dairy Development Board and a former secretary of food and agriculture with the central government, says it is a dilemma that farmers get lower prices and the consumers pay a high price. "We have far too many intermediaries. The government should promote a body to provide farmers linkages to the market and reduce wastage and cost. The government should make sure that a fair share of price reaches the farmer and he is encouraged to produce," he says. "If you keep on doing short-term things that are cosmetic in nature, it will not make a difference."