price shock has hit the country once again. This is the third price shock in the last 10 years. Onions, which were sold at approximately Rs 10 per kg in the wholesale market and at about Rs 20 per kg in the retail market during May and June, have crossed Rs 35 per kg in wholesale and Rs 60 per kg in retail in most markets in the country. Inter-year price volatility and intra-year abnormal price spread in any crop hurt both producers as well as consumers, besides the economy. Given that, it is important to understand the causes of abnormal price fluctuations and look at workable options to address the same.
The recurrent price shock reveals an interesting change in the behaviour of Indian consumers. Before discussing that, it is important to look at the trends in production and the availability of onions in the country. Onions have been the fastest growing crop in recent times. It recorded annual growth of about 10 per cent during 2004-05 to 2018-19 as domestic production increased from 6.43 million tonne to 23.49 million tonne. The per capita availability, net of exports, has risen from 5.15 kg in 2004-05 to 15.7 kg in 2018-19 — a more than threefold increase. The other food item that followed onions in terms of per capita consumption in the country is edible oil. Surely, Indians are fast moving towards spicy and oily food, much against the public policy goal to promote nutritive food.
It is actually astonishing that despite such increase in per capita availability of onion, a small decline in its availability causes a big jump in its price. This points to a change in the consumption behaviour of the average Indian and the absence of mechanisms to adapt to this change. Though onion
is not a staple food item — it is used primarily in preparing gravy and salads — its demand reveals considerable rigidity to any downward adjustment. It appears that consumers are willing to shell out three to four times the normal price of this commodity rather than go without it. Social pressure — of not being seen consuming onion
in lesser quantities because of the price rise — seems to be discouraging households from reducing onion intake.
The trigger and main reason for the abnormal increase in onion prices
in recent weeks is a decline in its production. Maharashtra is the biggest onion-producing state and the price leader. Due to the drought-like situation in some parts of the state, onions were sown on a much smaller area in the state in the last rabi season. This caused a 9.11 per cent decline in the annual onion production in the state. Because of this, NAFED went for record procurement of onion after the harvest of the rabi crop in the month of June to be able to deal with the eventuality of a price rise in the lean months of September to November. The second crop of onion, grown in the kharif season, was damaged because of excessive rain and flood in onion-growing areas of Maharashtra. The expectation of lower crop fuelled the price hike.
The trigger for the abnormal increase in onion prices
is a decline in its production
Like earlier years that got a similar price shock, the Centre has responded by imposing stock limits for traders and a ban on onion export. The first step is meant to check hoarding and the second is aimed to divert the produce from the export to the domestic market. The decision has come under criticism from some quarters that did not look at the price situation in its totality.
With regard to trade in food items, India and most other countries follow a policy of strategic liberalisation rather than free trade. This policy responds to production shortfall by liberalising import and restricting export. The opposite is done in the case of bumper production — restrictions on imports and push to exports.
In line with this policy, the country often imposed bans on the import of agri/food commodities to protect producers against low prices, though it came at a cost to consumers. The present situation justifies protection to consumers as onion prices
increased three times in a short period of three months since June. The current prices represent a big gain for farmers who waited to sell their rabi crop of onion in the lean months. The export ban will not hurt producers if the restrictions are removed when farmers start bringing their fresh harvest of kharif onion to the market in November or when prices come back to the normal level.
The recurring price cycle and the emerging demand and supply scenario related to onions provide useful insights into managing future price volatility. One, rigidity against downward movement in onion demand requires steady supply throughout the year. However, production is subject to fluctuations. This necessitates reliance on public stock for price stabilisation. We cannot expect the private sector to play the role — as any price fall or rise offer big gains to the private sector. Onion prices around this time would have skyrocketed if NAFED procured 53,000 tonne of onion (45.53 thousand tonnes from Maharashtra) as part of the price stabilisation fund was not available to be released in the market. The lesson from this is that the country should maintain a reasonable level of onion stock at the end of the rabi and kharif seasons, based on empirical data on season-wise production and demand. This will be beneficial not only to the consumers but also to the producers.
Two, preserved and processed products — like dehydrated onions, onion paste etc — should be promoted as substitutes of raw onion. Three, the base of onion production is very narrow as a third of India’s production is contributed by Maharashtra alone. With climatic events becoming severe, production variability is likely to increase in the future. Geographical diversification and cultivation of onion in new pockets, particularly kharif onion in northern states, would definitely help in reducing production fluctuation and price volatility. Four, suitable varieties of onion need to be developed for various agro-climatic conditions so that the seasonal span of the crop can be expanded or adjusted to have continuous supply in the markets. Five, there is a need to strengthen market intelligence on onions and develop a sort of early adjustment system on the lines of the early warning system of FAO. This should include advisory to farmers about next-season prices to encourage/discourage the area under cultivation.
Adopting these measures will prove effective in preventing the cycle of “onion tears” in the country.
Chand is member, NITI Aayog; Saxena is principal economist, National Institute of Agri Economics and Policy Research, New Delhi. Views are personal