IT may be an inconsequential little bulb, an unglamourous food item, but the onion has always been one of the most potent political commodities in India.

Political leaders and top ministers and bureaucrats may not worry much about water shortage, air pollution, atrocious roads and a deteriorating law and order situation, but when onion prices rise, there is hell to pay, so the entire state machinery goes into overdrive to cool down the prices.

Last week saw the ordinary onion once again hog the national limelight, as the price of the bulb shot up to record highs: it crossed the Rs80 a kg level and was poised to breach the Rs100-mark in cities including Delhi and Mumbai.

While agriculture minister Sharad Pawar, a key ally of the Congress in the United Progressive Alliance (UPA) government – and a leader of the regional Nationalist Congress Party (NCP), which has strong links to rich farmers in Maharashtra – tried to soft-pedal the issue, a worried federal government panicked and ordered large-scale imports of onions from both neighbouring countries – Pakistan and Bangladesh – and distant shores (Canada). It also banned the export of the commodity.

The onion, a staple diet for millions of poor people – in fact, nutritionists say it is the only vegetable in the diet of many impoverished families in rural India – may be a humble bulb, but it has in the past toppled state governments, or led to major political crises, especially in the north. In 1998, the Bharatiya Janata Party (BJP) lost elections to the Delhi state assembly – where it had been comfortably ensconced for five years – after onion prices shot up by six times in a short span just before polling.

Other governments have also lost elections caused partly by a spurt in the price of onions. The UPA government, barely 18 months into its second five-year term in office, has already been cornered by a vociferous – and stubborn – opposition led by the BJP over the issue of the 2G telecommunications spectrum allocation scam. There is virtual paralysis in the corridors of power in Delhi as the Manmohan Singh government is unable to push for much-needed reforms in many sectors in the face of a belligerent opposition.

The last thing that the government wants is to face the ire of the opposition on the matter of food price inflation. The opposition had earlier during the year organised a nation-wide 'bandh' to protest against food price inflation.

Congress sources fear that the UPA government is projecting its weakness on multiple fronts – corruption in government, food price inflation, stasis in governance and bickering allies – which could have a disastrous impact on the party's fortunes in state elections due to be held in key states including West Bengal and Tamil Nadu in 2011.

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INDIA is the world's second-largest producer of onions, though consumption of the bulb is a mere 20 grams per day per person. Agriculture is also among the most unreformed sectors in India, leading to stagnant growth, use of antiquated technology, prevalence of rent-seeking by intermediaries including middle-men who tend to hoard commodities when they sense a shortfall.

Economists have been urging the government to allow futures trading in all commodities including onions, to provide early price signals and supply conditions and enable growers to plan well in advance. However, in the absence of such a mechanism, growers and consumers are the worst-hit in times of a crisis.

Many wholesalers and retailers are smart enough to hoard commodities that they believe will fetch them a better price in the future, leading to a shortage in the market. But since the other end of the chain – the growers – are clueless about these signals, they are unable to take steps to enhance production.

Onion production in India has been declining as many farmers have burnt their fingers in the past. When onion prices are high, they take to cultivating the bulb. However, by the time it is harvested, prices would have tumbled, resulting in low price realisation, or even dumping of the commodity in the absence of demand. In Maharashtra, for instance, the land under cultivation has been declining sharply in recent years: it has come down to 170,000 hectares this year, from 250,000 hectares just two years ago.

Many growers in states like Maharashtra – one of the largest onion-producing regions – are now demanding a minimum support price (MSP) from the government. But MSP leads to distorting market forces, and consumers end up paying higher prices.

Though India has an elaborate agriculture-related bureaucracy, it lacks the skills to monitor different crops, cultivation patterns and demand and supply projections. The result: the government is suddenly confronted by shortages (or a glut in production) of agricultural commodities, leading to panicky reactions, such as ordering imports at short notice (and consequently paying a higher price), or banning exports, resulting in India being labelled as an unreliable supplier of farm produce.

The current shortfall in onion production has been attributed to unseasonal rains – which continued well into November, at least two months after the usual withdrawal of the south-west monsoon – in major onion-growing states including Maharashtra. Early warnings about a possible shortage of onions had been sounded by a few agricultural experts in October, but the government agency that imports agricultural products, the National Agricultural Cooperative Marketing Federation of India Ltd (NAFED), failed to react promptly; it imported a couple of thousand tonnes of onion from China and even less from Pakistan.

India's onion production has also been declining steadily; this year it is expected to be around 11.5 million tonnes, as against over 13.5 million tonnes just two years earlier. Unseasonal rains have destroyed nearly a million tonnes of onions in Maharashtra alone.

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THE UPA government decided to go in for large-scale imports of onions last week, even as warning signals were flashing about the return of food price inflation. Last week, food inflation jumped to double-digit figures, going up from 9.46 per cent to 12.13 per cent.

Top leaders, including finance minister Pranab Mukherjee, have been assuring the nation for much of 2010 about how food prices would be brought under control in due course. Initially, food prices were to have fallen in March, then there was talk of prices cooling after the onset of the monsoon; later, the government said prices would decline following the post-monsoon harvest.

However, the average Indian consumer has been suffering under the impact of high food inflation. While onion prices have grabbed national headlines, the price of most other vegetables and fruits are also at record levels. The price of garlic, tomatoes, most vegetables and even edible oil and milk are ruling at new highs. Tomato prices doubled to nearly Rs50 a kg in a matter of a week, as hoarders tried to exploit the situation.

The spurt in inflation has also put paid the government's plans to raise the price of diesel. Earlier this month, the government-owned oil marketing companies jacked the price of petrol by more than five per cent, even as global crude oil prices are soaring. The government had dilly-dallied over the price of diesel, worried about its impact on inflation.

Analysts were expecting the government to give the go-ahead to the refiners to raise diesel prices by Rs6 a litre, but with the onion crisis, the government is having second thoughts. Most vegetables and fruits are transported from the farm-gate to cities in trucks and any hike in diesel would further fuel food inflation.

The Reserve Bank of India, the country's central bank, is also expected to raise interest rates later next month to tackle the price rise. The bank had raised its key policy rates at least half a dozen times in 2010 to tackle inflation.