What govt needs to do to tackle seasonal spike in onion prices

Published: September 30, 2019 12:56:23 AM

This is likely to happen between late October and November, when the kharif crop will start arriving in the market and prices would nose-dive in any case.

This will reduce wastage, help farmers get a fair price, and allow consumers to switch to dehydrated onions in the lean season at affordable prices.

By Ashok Gulati & Harsh Wardhan

Onions are on the boil once again! With onion retail prices in Delhi crossing Rs 40/kg in mid-September, and being even higher in Mumbai, the government swung into action. It imposed minimum export price (MEP) of $850/tonne, followed by a central team of bureaucrats visiting Lasalgaon, India’s largest wholesale market of onions, to assess the situation. It won’t be a surprise if they blame onion traders for speculation and recommend stocking limits. While the heightened concern of the government is justified, we disagree with the policy instruments being used. Here is our take on it.

The onion price-rise in September is not new. Prices rise in September almost every year due to seasonality, but every alternate year, there is an accelerated spike (see graphic) due to ‘some other factors’. This shakes any political party in power. The standard response is imposition of MEP, stocking limits on traders, and sometimes, even income tax raids on onion traders! These crude measures don’t give sustainable solutions.

While onion price spikes make the government hyperactive, how many people remember that even between January and May 2019, when much of the late kharif and rabi onions were sold, wholesale prices in Lasalgaon hovered between Rs 4-10/kg, and on some days, even touched Rs 2/kg. This is against a cost of Rs 9-10/kg in Maharashtra, as estimated by the National Horticulture Research and Development Foundation (NHRDF). This means farmers incurred massive losses in 2019 from sales of onions, running into hundreds of crores of rupees. If the government was as hyperactive then to save the onion farmers from the price crash as it is to save the consumers today, perhaps these spikes would have been avoided. But, there is an inherent ‘consumer bias’ in our agri-price policies. Even more so, when MMTC imports onions and ‘dumps’ them at below their import parity prices to ‘tame’ domestic prices. This is likely to happen between late October and November, when the kharif crop will start arriving in the market and prices would nose-dive in any case.

It may be noted that both these policy instruments—restricting exports through high MEP, and dumping imported onions below cost—are not only anti-farmer but also anti-agri-exports, and go against the PM’s vision of doubling farmers’ incomes. This must be avoided at all costs.

The accompanying graphic shows that whenever high MEP, such as $850/tonne, which translates to roughly Rs 60/kg, is imposed, exports drop sharply. The export parity price from October 2018 till date has remained below $300/tonne . So, this MEP of $850/tonne will deprive farmers of whatever little benefits they were getting from onion exports. India has emerged as the largest exporter of onions in the world, having exported about 2.4 million tonnes in 2018-19 out of a production of 23.5 million tonnes. Remember that it takes years to build export markets, but with such abrupt export restrictions, India becomes an unreliable exporter, which adversely hits its unit value of exports. This is a much bigger damage compared to short-term gains the government is eyeing.

So, what could be best possible solution? First, one needs to remember that price stabilisation does not come free. Nafed, which is entrusted with price stabilisation, should procure at least 2-3 lakh tonnes of onion at the rabi harvest time (April-May), ensuring that farmers get at least Rs 12-15/kg, when they were previously getting Rs 4-8/kg. This will save onion farmers from a price-crash, and give them reasonable profits, incentivising production, and exports. But, these stored onions will incur storage costs. Storage at the farm level suffers losses of about 20-25%, which can be brought down to 5-10% in modern cold storages. But, cold stores cost about Rs 1.5/kg/month. These stored onions can, then, be released between August and first-half of October, before the kharif harvest starts arriving. If NAFED incurs, say, five months’ storage cost at about Rs 7.5/kg, and if the procurement is at Rs 12-15/kg, they can still offload at, say, Rs 20-23/kg, and retail price in September-October can be tamed below Rs 30/kg.

Second, our analysis of onion value chains for three years’ average, ending 2018-19, with season-wise weighted average of wholesale prices from major mandis in Maharashtra, MP, Gujarat, and Rajasthan catering to Delhi’s onion demand, reveals that onion farmers get a mere 29% share of the consumer’s rupee. The rest constitutes costs and margins of middlemen, with retailers apportioning the highest share. With the majority of onions traded through Agriculture Produce Market Committee (APMC) markets, the auctioning procedure is controlled by powerful traders and commission agents, with much less bargaining power for farmers. Layers of mandi fees, and commissions escalate prices further, without much value addition, or benefit to farmers. Our field visits to major mandis (Azadpur, Lasalgaon, Pimpalgaon, Mahuva) revealed that actual commissions are way above the prescribed charges. Officially levied on buyers, ultimately farmers bear their burden. What all this indicates is that major overhauling of APMC reforms is overdue.

Third, the Ministry of Food Processing Industries should extensively promote the use of dehydrated onions (flakes, powder, granules) among domestic households, and institutions like the armed forces, hospitals, restaurants, and schools (mid-day meals). This will take the pressure off fresh onions during lean season. Currently, India exports 85% of its dehydrated onions, and is the largest exporter of these products in the world. Dehydrated products are more durable, much cheaper to store; they can help check the spikes in onion prices. This will reduce wastage, help farmers get a fair price, and allow consumers to switch to dehydrated onions in the lean season at affordable prices.

If the government could do this, it would know its onion, especially on growing farmers income.

Gulati is Infosys Chair Professor for Agriculture, & Wardhan is Consultant, ICRIER.
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