Why the frequent spikes in onion prices

Onions in India have been witnessing an upswing in their prices on a regular basis for quite a long time. The saga of price spike in onions is as old as three decades.

Way back in 1980, in an unprecedented manner onions went beyond the reach of the common man; the price hike revisited the country again after a decade in 1998 and again in 2010.

Within a span of three years, the price of onions skyrocketed to an all-time high of about ₹150/kg in some major cities of the country in 2013. Two years later during the month of August 2015, onion prices soared again.

This year too, onions have become dearer, leaving the consumers teary-eyed.

The wholesale price of onion in Asia’s largest onion market, Lasalgaon in Maharashtra, increased to almost ₹40/kg, while the retail price soared to about ₹60/kg in metropolitan cities.

Last year’s drought, delayed monsoon followed by excessive rain in major growing regions of Maharashtra and Karnataka, has been cited as the main reason for the price hike.

Every time onion price hikes revisit the country, economists and policymakers debate as to what triggers the periodic upswing.

Some have emphatically pointed out that the price spikes can be attributed to a large extent to fragmented supply chain.

While some others invariably hold the supply constraint as the causal factor for the price hike along with a complex interplay of several factors such as rising consumption, drought and flood induced crop failures in major growing regions, poor infrastructure and inefficient storage facilities. What is the real truth? Onions are staple diet for majority of the people in India. They consume approximately 15 million tonnes of onion per year, and shelling out ₹80-100 to buy a kg of onion will definitely pinch the common man. This begs the question: How can a culinary ingredient witness such a steep hike in a few months’ time? Besides blaming the inadequate storage and transportation facilities and improper distribution system, policymakers invariably point out that such a stupendous price hike is only due to supply-demand constraints.

How can supply be held responsible for the price hike when data from the Ministry of Agriculture clearly show that the production of onion has surged from 2.5 million tonnes in 1980-81 to 22.43 million tonnes in 2016-17? Erratic monsoon can at the most lead to a 5-10 per cent shortfall in supply, but nowhere severe enough to warrant a quadrupling of prices within a span of few weeks.

What explains this pardox? Our analysis of 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 further suggests that supply has nothing to do with the abnormal price rise.

If not supply, what else is the driving factor behind the skyrocketing price of onion? Have the prices been inflated artificially? The Consortium of Indian Farmers Association (CIFA) and a study by Competition Commission of India (CCI) have pointed out that cartelisation and traders are jacking up the prices. Is this price rise related to hoarding dynamics?

In India, the onion trade is dictated by middlemen. A study by the National Council of Applied Economic Research (NCAER) reveals that farmers make a profit of just ₹5-8 per kg, with the wholesalers adding 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?

Every time onion prices soar, the standard response of the government is the imposition of minimum export price (MEP) and resorting to imports. While such a policy can at the most be a temporary solution to evade the crisis, it deprives the farmers of whatever little benefits they get from onion exports.

What is required is a robust long-term solution that involves a bottom-up approach. Our analysis of market arrivals and wholesale/retail prices across the major markets of the country clearly points out that the annual see-sawing of onion prices is primarily due to hoarding and not because of supply constraints.

Theoretically, such 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 beneficiaries as they continue to exploit the farmers in the event of a price rise as well as during a price fall.

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

Market intervention is also an effective instrument in controlling prices in essential commodities like onion. Taking cue from the successful experience of Tamil Nadu, farmers’ market or rythu bazars need to be implemented in all the States.

This is an effective mechanism of getting rid of the dominance of middlemen in agricultural trade. Contract farming is another effective measure of strengthening the distribution system. Under this system, farmers are allowed to make advance contracts under no compulsion with known buyers 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.

Besides, the country’s onion farmers should look to replicate the on-farm storage structures built by farmers of Maharashtra, which do not require any cutting-edge technology.

Only such measures and transparent governance can save the country from the annual spikes in the prices of essential commodities like onions and tomatoes.

Narayanamoorthy is former Member (Official), Commission for Agricultural Cost and Prices, and Alli is Senior Assistant Professor in Economics, Department of Social Sciences, Vellore Institute of Technology. The views are personal.

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