Peeling the onion price crisis

Yet again onions have become dearer, leaving the consumers in tears. As the fury over the sharp spike in onion prices continues to escalate across the country, one cannot get away from the harsh reality that the country has witnessed an upswing in onion prices during 1980, 1998, 2010, 2013, 2015 and 2019.

The decades-old crisis is back this year, too, with the retail price of onion soaring to about ₹100/kg in major cities. While the excessive rain in key growing regions of Maharashtra, Madhya Pradesh and Karnataka is the main reason for the price hike, some have blamed the recently passed Farm Bills.

To check the incessant price hikes since late August, the Centre has relaxed the import norms for onions to boost domestic supply. The government is also expected to offload more onions from the buffer stock in the coming days to reduce the retail prices.

As the blame game continues, economists and policymakers seize this opportunity to debate as to what triggers the periodic upswing in onion prices. Some view that the price spikes is largely due to fragmented supply chain, while others hold the supply constraint as the causal factor along with a complex interplay of several factors such as rising consumption, flood induced crop failure in major growing regions, poor infrastructure and inefficient storage facilities. It is high time to decode as to what is the real cause.

Myths and realities

Indians consume approximately 15 million tonnes of onion every year. And shelling out ₹80-100 to buy a kg of onion definitely hurts the common man’s pocket. Besides blaming the inadequate storage and transportation facilities and improper distribution system, many invariably point out that such a sharp price hike is only due to supply-demand factors.

It is totally incorrect to hold supply solely responsible for the price hike, as the data from Ministry of Agriculture clearly shows that the production of onion has increased significantly from 2.5 million tonnes in 1980-81 to 23.26 million tonnes in 2017-18.

While erratic monsoon can at the most bring about a shortage of 5-10 per cent in supply, it cannot warrant a quadrupling of prices within a span of few weeks. So what explains this paradox?

Our crude analysis on data on market arrivals and prices of onion culled from the National Horticulture Research and Development Foundation (NHRDF) reveals that the former is in no way related to the latter which again suggests that supply has nothing to do with the abnormal price rise. If not supply what is the prime factor behind the skyrocketing price of onion?

A study by the Consortium of Indian Farmers Association (CIFA) and by the Competition Commission of India (CCI), which suggest cartelisation and traders are jacking up prices, do confirm that the price rise is related to hoarding dynamics.

The onion trade in India is unilaterally dictated by the middlemen, which can be seen in major onion markets. A study by the National Council of Applied Economic Research (NCAER) says farmers hardly make a profit of ₹5-8 per kg, with the wholesalers adding to 10-15 per cent and retailers gaining the most with a mark-up of 20-25 per cent. This being the ground reality, the price rise will neither get translated to more earnings to farmer, nor will it benefit the consumers.

What needs to be done?

Theoretically, higher food prices should increase the profits of farmers. But are farmers benefiting from such price rise?

In reality, farmers miss out on this opportunity primarily because they cannot achieve sufficient economies of scale as they lack access to markets. It is indeed the middlemen who seem to be the greatest beneficiary as they continue to exploit the farmers in the event of a price rise as well as during a price fall.

And the government’s intervention is seen only when prices spike and not when they fall. During a price hike, the government’s standard response is to allow imports and impose minimum export price.

While such a policy can at the most be an ad hoc measure to deal with the crisis, it is against the spirit of the recently passed Farm Bills and also deprives the farmers of whatever little benefits they get from onion exports. Going by the results of our study and various other studies which clearly point out that the annual see-saw of onion prices is primarily due to the hoarding dynamics and not due to supply constraint, a robust long-term measure in the form of bottom-up approach is the need of the hour.

First and foremost is to discipline the trade by cracking down on the chain of middlemen, wholesalers, pseudo farmers who eye windfall profits in the hoarding game, and enforcing stringent measures towards banning secret bidding of produce.

The market intervention scheme is also an effective instrument in controlling prices in sensitive commodities like onion. Taking a cue from the successful experience of Tamil Nadu, farmers’ market or rythu bazars need to be implemented in all the States, which is an effective mechanism of curtailing the dominance of middlemen in agricultural trade.

The recently passed Farmers’ Agreement of Price Assurance and Farm Services Bill and Farmers’ Produce Trade and Commerce Bill if accepted by all States will strengthen the distribution system, allowing farmers to make advance contracts under no compulsion with known buyer on the delivery of certain commodity at specified price, location and on the maturity of crop.

Since there is no compulsion for farmers to bring their produce to the market yard, they can directly sell the produce to even private players, food processing industries and retailers. This process will also bring a win-win proposition for both producers and consumers. Onion prices usually spike during the August to December period partly due to climatic reasons. Therefore, appropriate seed varieties need to be developed that can be cultivated through all the seasons to reduce supply fluctuations. Besides, the government should also invest adequately on the on-farm storage structure in all the major onion-growing areas to reduce the wastage occurring due to unseasonal rainfall.

Narayanamoorthy is Senior Professor and Head, Department of Economics and Rural Development, Alagappa University, Karaikudi; and Alli is Senior Assistant Professor in Economics, Department of Social Sciences, Vellore Institute of Technology. The views are personal.

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