Onion Prices: Worst Is Over, but Are We Prepared for Next Year?

Onion prices have gone down, but the burden has been borne by the stockists and the farmers.

Onion farmers across Nashik are staging protests on account of the export ban that was levied on 29 September, after the government, on 15 September, tried to rein in the prices by affixing a Minimum Export Price (MEP) as high as USD 850 per tonne (translating to RS 60/kg). At its peak, retail price surged to Rs 100/kg in Delhi. However, the export ban and stock limits reduced the prices temporarily by 30 percent. The export ban has left the farmers disgruntled, forcing them to stage protests, disrupting supply and causing yet another surge in onion prices. Arrivals at Lasalgaon on Monday (7 October), have been the lowest in 2019.

The ban on export has been a departure from the overall incentive plans for Indian exporters.

It is also likely to dampen the much-required attempts made through income support schemes to drive rural consumption. Tools such as MEP and complete trade bans remain critical as a reactive strategy. However, they are inconsistent with the overall economic climate and the mood of policies that are required to boost rural demand.

As the government laudably announced the demand of revival efforts and the speeding up of cash transfers under the PM Kisan scheme and Farmer Pension schemes, with the aim of increasing disposable income available to farmers, export bans are likely to crowd-out the impact that these policies were likely to make.

Govts Change, Farmers Continue to Suffer

Bans impact farmer income as they are delineated from an opportunity of earning from their commercial crops. Protesting farmers do not auger well for Maharashtra as the state goes for polls later this month. While the rise of onion prices do not strike ‘surgically’, they do have tremendous political implications.

Delhi CM Arvind Kejriwal leveraged ration shops and mobile vans to sell onions at Rs 23.9 / kg when they were selling in the range of Rs 60-80 kg. A similar step was taken in October 1998 when the dissatisfaction over high onion prices led to underwhelming the euphoria that the Vajpayee-led government had generated after the historic nuclear tests.

A decade down the line, what remains the same is the instrument of choice, and the ‘victim’ by design.

Indian farmers have repeatedly borne the brunt of these hasty policy decisions taken at Delhi.

The cost of cultivation for a kilogram of onion roughly ranges from Rs 9-10 / kg, and in the best case scenario, farmers operate at break-even prices even when the consumer pays Rs 80 / kg. According to Dr Ashok Gulati, it is seen that on an average, an onion farmer receives a meagre 29 percent of every rupee spent by the consumer.

Traders Reap Real Harvest Benefits, While Farmers See Marginal Gains

It is not news that traders reap the real harvest benefits from high prices, while farmers only see marginal gains in comparison. The brunt faced due to the depressing prices is also disproportionate, with farmers selling their produce at as low as Rs 2 / kg to traders, and thus, sink in losses.

It is also important to note that onion prices form about 13 percent of the overall expenditure on vegetables taken up by an average household.

On the other hand, for onion growers, the revenue earned forms a significant proportion of the total annual household income, as onion is a commercial crop.

With over 1,285,000 hectares under cultivation in the seasons in 2017-18, India is the world’s second largest producer, and the number of farmers involved in onion production is significant. Thus, while rising prices temporarily impact the consumption basket and inflation, the impact of forgone income will be lasting, given that disposable incomes are currently very low. This implies that, amidst attempts to revive rural demand, while inflation is kept under watch, it is important that other economic indicators are not ignored.

Solutions Aren’t Enough, Govt Must Take Preemptive Steps

Soaring onion prices are more of a symptom reflecting the gap in sharp policy-making for agriculture and the rural economy. At a time when the Indian economy is far from being in the pink of health, years of ignorance and short-term fixes as policy tools will further impact the rural demand that needs to thrive, in order to overturn the slowdown.

Onion prices are bound to go up in September-October. If the monsoon crop is affected, the prices are likely to sky rocket. However, with the arrival of crops increasing in October-November the prices will reduce over time. This is not a new problem, and year after year, while the same critiqued instruments of MEPs and export bans are used, Indian farmers and the reliability of Indian exporters continues to suffer.

The solutions have been reiterated by experts over the years, however, this will require the government to take preemptive steps and a serious attempt to solve this crisis.

Given the recurrence of the problem, the solutions have been laid out year after year. A few prominent long-term solutions shared by experts are price stabilisation through government procurement, forecasting production, building storage infrastructure, increasing private investment, incentivising modern retail trade to directly procure from famers, and promoting the processing of onions to reduce the dependency on fresh onions during small periods. Other overarching solutions continue to be an overhaul of the APMC system to pierce trader lobbies and supernormal profits. However, implementation of these solutions have been muted.

Incentivising Modern Retailers

A low-hanging fruit that is going amiss is the significant role that modern retail can play in the sale of F&B and in stabilising the value chain. While modern retailing has seen exemplary growth in the past years, the modern retail market (supermarkets and hypermarkets) continues to be around 2 percent ( USD 7.6 billion) of total retail, and less than 20 percent of total export (USD 39.4 billion). The small percentage highlights a missed opportunity. In an essay published in 2012 by Thomas Reardon and Bart Minten, ‘The Quiet Revolution in India’s Supply Chain’, the authors went on to extrapolate that, given the growth rate of modern retail in 2012 (twice as fast as food exports), in 5-10 years modern food retail may be a more important ‘modern market’ than exports for India.

Reardon and Minten also go on to note that Indian private retail chains have several unique characteristics:

1. they are driven by domestic investment
2. they have made quick penetration into small cities and even rural towns
3. it is ‘early’ in terms of usual international patterns, in its diversification into small format stores

These positive attributes again highlight the opportunities that incentivising modern retailers could bring to both urban and rural areas. Better storage facilities, extension services and value chain management will directly enable the farmers to earn more, have a more-steady, stable income and consistent rural demands.

Consistent and Bold Policies Required

Modern retail, export and import policy is marred by ad hoc decisions largely triggered by rising prices and consumer plight. How these tools will lead to the doubling of farmers’ income in the next three years or even six, is a question that needs deep contemplation by policy-makers.

Given the current government’s inclination towards bombastic, ‘historic’ policy announcements, it will be good to see them use the adrenalin to deliver much required policy changes to make-good on their commitment of doubling farmers’ income (even if not in the next three years, but somewhere in the offing).

With onion prices coming down, it seems the worst for this year is over. However, the burden has been borne by the stockists and the farmers.

Will this impact the supply next year? It is highly likely. Will we be prepared? Unlikely. Are we crowding out the impact of schemes to promote rural demand with reactive policy-making? We will know soon.

(Parikrama Chowdhry currently leads impact assessment and communications at an organisation that works towards driving agri-entrepreneurship and smallholder prosperity. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)