The Issue
People in India eat 15 million tonnes of onions a year and the onion price is seen as an indicator of the health of the Indian economy; such is the love for onions. Onion is a staple vegetable for the poor, indispensable to many Indian cuisines and recipes, from spicy curries to tangy relishes. In recent years, the price of staples such as onions has been on the rise, causing large protests.
The highest-priced red gold apples from Himachal Pradesh sold at around ` 34 per kg, while onions from Maharashtra and Madhya Pradesh sold ` 40 to 80 in Delhi and other metros. Currently. there has been a spike in retail onion price up to ` 100/kg on tight supply.
According to the Centre of Monitoring Indian Economy’s (CMIE) database, the average annual growth in wholesale onion prices in the recent past has been 67 per cent. This figure suggests that there is more to the current hike than causes related to productivity, seasonal uncertainty, and many more.
All vegetables—and not onion alone—are affected by climate risk, poor productivity, a gap between demand and supply, and an inefficient supply chain. It is estimated that over 35–40 per cent of fruits and vegetables get wasted in India.
Prices of vegetables like brinjal and ladies finger also increase steeply at times but these don’t seem to matter much to consumers, unlike onion.
With the sharp rise of onion price, the political economy of India has shown a different trend. As the price of onions moves too far one way or another, it angers a large block of voters, be they everyday households or the country’s farmers. Such is the situation that onion price rise has become a political blame game among different parties and the issue is raised in the course of electioneering.
Causes of Price Rise
Onion prices have risen sharply because of excessive rains in Karnataka, Maharashtra, and Madhya Pradesh, which produce 60 per cent of India’s onion. Due to heavy rains, farmers could not harvest their crop in time, leading to an acute shortage of onion supply in the market. Some trade analysts say onion prices generally see a spike during July–December because of floods and illegal hoarding of onion ahead of the festive season.
Controlling Methods
India should explore low-cost modern technology models from countries like Israel and Brazil for storing the commodity, the industry body FICCI said. There was a need to remove onion from the purview of the Essential Commodities Act and undertake agriculture marketing reforms to facilitate a direct purchase from the farmer in a transparent way.
Some methods in controlling prices seem faulty as it is known that tepid food prices have been the biggest reason for inflation in the last few years. Food buyers have gained at the cost of food sellers. And this has put a severe squeeze on farm incomes.
Farmers are perpetually distressed in this country. Often seen as unskilled and unwanted in the larger economy, they perform the crucial function of ensuing food security for the nation.
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The government is following a three-step strategy: (1) ban exports, (2) increase imports, and (3) mount raids on traders for hoarding.
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There are rational ways to resolve the contradiction. If farmers are denied a windfall gain by the government to keep inflation under check, then there should also be a provision to ensure that there are no windfall losses for farmers at the time of surplus. Bumper harvests are more unfair to vegetable farmers because middlemen squeeze price paid to farmers, without passing on the entire gains to consumers.
Private Distribution Agencies
The government should appoint a private trading agency for marginal but politically sensitive food crops, which can be mandated c to import, export or arrange for domestic distribution to balance market-led demand and supply and keep retail prices within a pre-defined retail trading band, which would meet the twin needs of farmers and consumers. This is what the RBI does for our currency to avoid excessive volatility. Private trading agencies would charge a hefty commission for their services but it would be considerably less than the cost of direct administrative action to purchase, stock and supply onions along the Food Corporation of India model.
Bilateral Onion Supply Agreement
We can use onions as a vehicle for building bridges with our neighbours, particularly Pakistan and Bangladesh which love the stuff almost as much. Why not negotiate a stand-by, bilateral onion supply agreement to meet onion deficits in either country on preferential terms? A similar arrangement is possible with our larger northern neighbour, China whose onion productivity exceeds ours!
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India is the second largest producer of onion in the world next to China. However, the productivity is low as compared to other countries like Egypt, Iran, and the Netherlands. Productivity of China is 22 metric tonnes per hectare, while the productivity of India is 14.2 metric tonnes per hectare.
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Banning Export
Increasing the minimum export price, as the government has done again in 2019, is the standard response. But such intervention in the market, even as it helps consumers by diverting supply to the domestic market, robs farmers of the gains from export. It also disrupts any attempt to develop export markets. Similarly, importing onions to keep consumer price low reduces the incentives for farmers to grow onions.
But both these options are less intrusive than using the public procurement and subsidised retail supply template used for food grain. Such publicly managed mechanisms are invariably highly inefficient and ineffective with cascading losses in procurement, storage, transportation, distribution, and retail sale.
Sometimes, inept government-managed imports flood the market after the seasonal supply dip has passed and just as the new crop arrives— with disastrous impact on farmers’ incomes.
Other Solutions
Open-ventilated onion warehouses and ventilated silos can be used to store onions as this vegetable, unlike others, does not require cold storage. Even without maintenance, onions can last for a few months in open-ventilated warehouses without getting spoilt.
These warehouses are fairly simple to maintain and use. Wastages can be reduced by storing them in such places. Other countries like Brazil extremely use such ventilated warehouses.
Satellite image-based identification of cropped area can pre-empt shortfalls.
Onion crops can be protected from adverse environmental effects by growing them in low-height greenhouses.
Onions can be processed into a dehydrated form for use in case of emergencies.
All these steps may lead to increase in productivity and profits for farmers over time.
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Concerns for Farmers
There seems no sympathy for the onion farmers. The government, by intervening to bring down prices, is unfairly denying them some good profits. Farmers, who grow vegetables, such as onions and potatoes, always face greater risk than their peers growing cereals, such as rice and wheat. Not only are vegetable prices more volatile, their producers are also susceptible to predatory behaviour by buyers.
The behaviour of retail-whole- sale mark-up for vegetables, such as onions and potatoes, is quite different from that of cereals, such as rice and wheat. Unlike cereals, vegetables are perishable in nature and, therefore, farmers have less power to hold back their harvest when prices are lower.
Another aspect is that the wholesale onion prices and retail-wholesale price mark-up, move in opposite direction. When the wholesale prices are down, mark-ups are higher, and when wholesale prices are higher, mark-ups go down.
This shows that, when farmers are getting lower prices, the benefits are not passed on to the consumers, whereas when prices go up, farmers are seen as the culprits and attempts are made to bring down wholesale prices.
The behaviour of retail-whole sale price mark-up for vegetables, such as onions and potatoes, is quite different from that of cereals, such as rice and wheat. The government also provides minimum support prices (MSPs) for rice and wheat which provides some sort of floor for their prices but such benefit is not available for farmers growing fruits and vegetables.
Farmers dealing in horticultural products face a much bigger risk than those who grow cereals. It is also noted that onion farming is reducing as farmers feel that they will not avail of fair price.
The Political Angle
The uproar about onions is more about politics than economics. However, onions are so crucial that they have even featured in election campaigns. The Delhi state government bought and sold them at subsidised rates in September 2019 when prices were at their peak.
Indira Gandhi swept to power in 1980 on slogans that used soaring onion prices as a metaphor for the economic failures of the previous government. In 1998, a sharp price rise in onions, dethroned the BJP government of chief minister Madanlal Khurana in Delhi thereby establishing a new metric for good governance, the price of onions.
In today’s intensely adversarial, no-holds-barred competitive politics, no government can ignore a public challenge. The traditionally business-friendly BJP government, at the centre, is particularly sensitive when ‘hoarders’ are fingered for the price rise.
Clearly, the government needs an effective and transparent mechanism, which can provide the right price signals and rationalises expectations for both farmers and consumers.
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