Column: Dousing the vegetable fire

Updated: Oct 11 2013, 10:27am hrs
Food articles inflation in August 2013 (over last August 2012) stood at a biting level of 18%. Within food articles, while cereal prices were up by 14%, led by a 20% increase in rice prices, vegetables were literally on fire, with a price rise of 78%! Onion prices were soaring at 244%, but many other vegetables were not far behind. Cabbage prices were up by 120%, brinjals up by 84% and tomatoes by 43%. The only relief came from friendly potatoes, which were down by 15%. This exorbitant increase in prices of vegetables indicates that there is something seriously wrong with our vegetable sector, and unless we diagnose its problems and fix them, this will repeat year after year. It is onions this August, it could be tomatoes or potatoes or others in the coming years.

Before recommending any policy prescription, it is important to have a proper diagnostics of the situation. For this, first we should be clear that vegetable prices have a seasonality: they go up at the onset of monsoon in June and peak during August-September, almost every year. Sometimes, the rally may continue through the early weeks of October. But thereafter the prices decline and touch a low towards December-February.

Second, it must be noted that onions are demanded for their peculiar characteristic, namely their pungency, and are mixed with almost every other vegetable/dal/curry in tadka, which makes them tastier. Since there are no close substitutes to this pungency factor, it makes demand for onions very inelastic. In theory, what this implies is that a small decrease in supplies of onions can result in disproportionate rise in its prices.

Third, although onions are cultivated almost all over the country, yet Maharashtra (with 33% share) and Karnataka (with 18%) control more than half of Indias onion production, and more than 70% of inter-state trade. So what happens in these two states with respect to onions is critical. It may also be noted that onion has basically three major cropping seasons, one in rabi which is the biggest (60%), the other in kharif (20%) and then another one in late kharif (20%). Rabi being the major crop of onions, which is harvested during April-May, and is then stored for meeting demand till the next crop (kharif) comes in October-November. Obviously, August-September become critical months when the stocks-to-use ratio could be at its lowest ebb, and any disruption in supplies due to drop in production or heavy rains can lead to speculation about rising prices of onions. Such speculations feed on itself triggering hoardings all along the value chainsfrom farmers to tradersand thus making price spikes even more sharp. This is what seems to have happened this year with onion area shrinking by 12% and production by about 7%, as per the National Horticulture Board.

So how do policymakers react to such hikes in vegetable prices Often, private traders are made the scapegoats and the administration remains on the look-out for hoarders. But so far it has not helped them to cool down vegetable prices, be it onions, cabbages, brinjals or tomatoes. Given the weak governance, such raids on hoarders only increase rent-seeking, not tame the prices of vegetables.

A more sustainable and rational policy choice to contain the spikes in vegetable prices would be to streamline their value chains, followed by assigning high priority to food processing. In case of sensitive commodities with inelastic demand, such as onions, some buffer stocking in the form of dehydrated chopped onions would also be a deterrent to any hoarders to exploit the situation. The technology to dehydrate onions in chopped form exists in India, and the relevant firm is exporting dehydrated onions to countries like Japan. Onions have 80-85% water, and by dehydrating one can bring this water level to less than 5%, extending its shelf life and minimising the storage space. The government of Delhi as a large consumer, and those of Maharashtra and Karnataka as large producers, need to get into some buffer stocking of this dehydrated version with a view to stabilise the price of this sensitive commodity.

On the policy front, the first major reform needed is in the APMC Act, whereby perishables like vegetables and fruits should be removed from its ambit. This will potentially reduce the layers of middlemen and rent-seeking players. But this change alone, though necessary, will not be sufficient to build efficient value chains. For that, one needs to invest in logistics, technology and institutions. The small and marginal farmers will have to be organised into farmer producer organisations (FPOs), and then linked to food processors and organised retailers. For that, food processing and organised retail needs to be incentivised and promoted. Unless they grow, they will not be interested in streamlining the back-end.

It is worth remembering that the revolution in milk could not have taken place if investments in chillers in rural areas were missing. Unless there were investments in logistics to carry milk from hinterlands to large-scale pasteurising and homogenising plants, and there were linkages established with the organised distribution network in cities like Delhi, the revolution would have remained a distant dream. In the milk story, a la AMUL model, much of the investments in logistics and processing came at cheap rates by monetising the EC aid.

But, in todays context, the government can think of some public-private partnership to incentivise the private sector to build efficient value chains, particularly for various vegetables and fruits. This would help reduce the commission of middlemen, and thereby help farmers and consumers alike. We need to move from supply-driven chains to demand-driven chains, and that requires a greater role for the organised retailers and processors. It is they who will build facilities for aggregation, grading, sorting, bar-coding, packaging etc, all at the village level, creating lakhs of off-farm rural jobs. They will also build cold-storage facilities, or bring in specialised players to do so, and build processing plants, all of which will then help smoothen supply-chains and tame the volatility of vegetable prices. But all this will take time, as Rome was not built in a day.

The Centre often says that it is a state subject and it is up to the states to take initiative in this direction. But given that Azadpur mandi in Delhi and Vashi market in Mumbai both fall within the jurisdiction of the state governments that are headed by political parties that have a coalition at the Centre, this should be a test case. Once these two markets are reformed, others can follow.

However, vegetables are on fire today, and the only way to douse their fire is by opening up imports and reducing import duties to 0% or 5%, from the current level of 30% for several vegetables and fruits. And, if need be, the government should import onions and throw in the market at a subsidised rate to cool the markets.

Ashok Gulati/ Shweta Saini

Ashok Gulati is chairman of the Commission for Agricultural Costs and Prices.

Shweta Saini is a consultant at ICRIER. Views are personal