The MP chief minister realised the sensitivity of the incident, and quickly announced the decision to procure onions at Rs 800/quintal. State agencies procured 8.76 lakh tonnes.
Onion is once again in the news. A couple of weeks ago, its retail prices had touched Rs 50/kg in several markets, and wholesale prices had touched Rs 30/kg in major onion markets like Lasalgaon in Maharashtra. This is not the first time onion prices have spiked. Almost every alternate year, this roller-coaster of boom and bust in onion prices happens. But 2017 is interesting as it saw record low prices in May-June 2017 when farmers sold onions at around Rs 2/kg in several mandis of Madhya Pradesh (MP), bringing tears and anger to farmers. The situation became precarious when farmers protested and police fired at them resulting in unfortunate deaths. The MP chief minister realised the sensitivity of the incident, and quickly announced the decision to procure onions at Rs 800/quintal. State agencies procured 8.76 lakh tonnes. But, in the absence of ample storage capacity in the state, onions had to be quickly disposed off through PDS and open market operations at almost one-fifth the cost. The whole operation caused a loss of Rs 785 crore to the MP government.
However, the more unusual aspect of the onion scene is that, only a few months later, in August 2017, prices started shooting up, resulting in visit by officers of Union ministry of consumer affairs to Lasalgaon, income tax-raids on traders in September and suspension of trading in Lasalgaon APMC for about a month. The prices fell down for some time, but they have been rising since Diwali. This prompted the government to announce import of onion by MMTC to bring down domestic prices. And this is not the first year when government action has been so ad hoc and puzzling within a few months. In the previous years, we have seen government fixing minimum export price, banning exports of onion and even a study by Competition Commission of India. Lesson: Income-tax raids proved futile in keeping the lid on onion prices even for few months! We need better policies.
So, what is it that causes high volatility in onion prices, and what is a way out? In order to respond to these questions, one may first note that India produced 21.7 million metric tons (mmt) of onions, which is about 20% of global production in 2016-17, second only to China. India also exported 2.4 mmt in 2016-17, up from 1.2 mmt in 2014-15. About 60% of onion production is in the rabi season, sown in December-January and harvested in April-May. This is the onion which is stored by farmers and traders, and it meets export as well as domestic demand till the arrival of the kharif onion crop, which is sown in May-June and harvested in October-November. Late kharif crop is sown in August- September and harvested in January-February. Kharif and late kharif crops produce about 20% each of annual production. Kharif onion is of rather poor quality and cannot be stored for very long. The prices tend to rise in October-November when rabi onion stocks are almost depleted and kharif onion is yet to hit the market, or if kharif crop is damaged as is the case this year.
One of the prime reasons behind high volatility in onion prices stems from lack of storage facilities—these have not kept pace with rising production. Also, the traditional storage practices incur losses as high as 40%. While Maharashtra used Rashtriya Krishi Vikas Yojana and National Horticulture Mission and created 42,282 low cost onion storage structures having a capacity of 9.65 lakh tonnes, there is hardly any storage facility in MP. No wonder, MP farmers suffered most in a bumper onion crop year. However, modern cold storages, like the ones being set up by Allround India, a subsidiary of Allround Holland, and other such companies, can bring down wastages within 10-15% range. So, the first policy action has to be to promote modern cold storages, and develop a system akin to that of warehouse receipt system for farmers. While bulk of storage has to be by private sector, the state can do some stocking under a price stabilisation fund. They can hire services of specialised private sector agencies to carry out such operations. The second policy instrument is using trade policy for price stabilisation. In case of bumper crop, promote exports, and in case of deficit crop, encourage imports. This has to be done well in advance, as soon as one comes to know the advance estimates of production.
The third policy instrument is to encourage setting up of onion dehydrating units, as also promoting demand for dehydrated onions amongst large consumers (restaurants, fast food chains, army, hospitals, etc). Gujarat has already emerged as the main centre for dehydration units, with 85 out of 100 units located there, while Maharashtra has just five units. Dehydrated onion is being exported to Japan, Europe, Russia, US and some African countries. The Ministry of Food Processing and state governments can encourage entrepreneurs to avail grant for setting up onion dehydration and processing units. A subsidy of up to 35% with a cap of Rs 5 crore is available to such units. However, the budget of the ministry of food processing for this scheme is just Rs 95 crore! And MP, in its budget for FY18, has provided just Rs 7 crore grant to food processing units. This needs to go up many folds if we are serious about encouraging food processing and stabilising prices of even fresh onions. Thus, instead of raiding traders or banning exports, etc, the Centre and the states would do better if they promote investment in scientific storage and processing facilities, and use trade policy more judiciously.
Ashok Gulati & Siraj Hussain
Gulati is Infosys Chair professor for agriculture, and Hussain, former secretary, ministry of agriculture, is visiting senior fellow, ICRIER