Economics of Onions

Economics of Onions

Kamaraj IAS Academy | Economics of Onions
  • October 9, 2019, 11:27 am

Economics of Onions

Onions in India are once more at the epicentre of a major controversy, government officials who want lower prices against farmers that need extra income. Prices of the vegetable surged more than 200 per cent in September from previous months. That's prompted the government to ban exports and crack down on hoarding to lower prices. This isn't the first time onions have taken centre stage in Indian politics. In 1998, high onion prices were cited for the Bharatiya Janata Party losing the vote in New Delhi. In 2013, onions were blamed for soaring inflation.

What is the government doing?

The centre has also eliminated a 10% subsidy that was aimed at boosting onion exports because of the waning supplies. The government of India, which is the world’s second-largest onion producer behind China, also moved to set up a buffer stock of 50,000 tonnes to help weather any supply interruption. The onion market holds significant political influence in India and is tightly regulated by the government in an effort to control price volatility.

The Centre has taken several measures to arrest the prices of onion in Delhi and other parts of the country. It is offloading onion from its buffer stock through agencies like NAFED(National Agricultural Cooperative Marketing Federation of India Ltd) and NCCF(National Cooperative Consumers Federation Ltd) which are selling at around Rs 22/kg and state-run Mother Dairy at Rs 23.90 per kg in the national capital (fixed prices).

The state governments have been asked to boost supply in their states lifting central buffer stock. Some states like Delhi, Tripura and Andhra Pradesh have shown interest so far. The centre has a buffer stock of 56,000 tonnes of onion, of which 16,000 tonnes has been offloaded so far. In Delhi, 200 tonnes a day is being offloaded. Besides, the Centre has discouraged export of onion by increasing the minimum export price and withdrawing incentives. It is also cracking down on black marketeers.

Why Suddenly Stopped Exporting Onions?

Earlier this week, one of the world’s largest onion exporters—India—announced that it will be banning onion exports in the midst of a shortage. And vendors also face restrictions on how many onions they can stock at a time in order to prevent hoarding. The retail traders can only stock up to 100 quintals of onions, while wholesale traders can have 500 quintals. (One quintal equals 100 kilograms, or roughly 220 pound) The effect is being felt outside India, too. In Dhaka, Bangladesh, onion prices have surged so much that some vendors have stopped selling them, making them scarce in marketplaces. And Nepal, which imported 370 million pounds of onions from India last year, is now facing an onion shortage of its own.

Why season is not the only reason to blame?

The spike in the price of onion and tomato comes ahead of Navratri and after the holy month of Shravan, when the consumption goes down. Lakhs of people in Maharashtra do no consume onions (and non-vegetarian food) in their food during these periods. Heavy rain and subsequent flood in key producer states like Karnataka, Maharashtra, Madhya Pradesh, Gujarat, Rajasthan, Uttar Pradesh, and Bihar are some of the key reasons why the prices of vegetables have been going up for past one week. Due to the excess rain this year, farmers could not harvest their crop in time, leading to an acute shortage of onion supply in the market.

Why do onion prices in India fluctuate so often (compared to other vegetables) and how is this significant in the economy?

Demand for onions is completely inelastic.

(Inelasticity is when price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.)

Additionally, there is also a lot of demand of Indian Onion in the world. Onion is mainly exported from India in the form of dehydrated onion, canned onion and onion pickle. Dehydrated onions are considered as a potential product in world trade and India is the second largest producer of dehydrated onions in the world. So, I think it is safe to say that with onions, increasing high inelastic demand is a big factor for why market prices of onions is so volatile.

Onion and it’s erratic Supply

Onion is a winter season crop. It is grown during winter and harvested before the real hot season begins. In India, onion is grown in three crop seasons: Rabi (Summer Crop), Kharif (Early Winter Crop) & (Late Winter Crop). So, as per general seasonal trend, price of onion tend to increase and reach at peak during September to November and drops in January-March with the arrival of the late kharif crop. And mostly when the winter (kharif) crop harvest is poor, the onion supply goes down and prices spike during winters. It has been observed that the main Kharif yields' dependency on rains disturbs the regular production and amounts to heavy losses of the produce as well as of farmer’s incomes.

Sometimes, price rise (retail price rise in particular) may also be due to delayed arrival of onions in the market, delays may be due to natural causes or man-made caused by activities like hoarding, supply chain mismanagement and government actions plus also due to general inflation of fuel prices.

The government controls the prices of Onions through various measures like setting 'Minimum Export Price' (MEP) and including onions in the 'Essential Commodities Act' while reducing stock holding limits but it only works to an extent because of market structures. About 97% of the country’s onion harvest is sold in 50 major onion market yards, regulated under the APMC Act.

Each state has its own version of the model Agricultural Produce Marketing Committee Act (APMC Act). This determines the market structure—who can buy and sell to whom, where, when and the charges and taxes to be paid at each stage. Typically, thousands of small farmers bring their produce to a small number of licensed commission agents, traders and exporters at their nearest market. Here, quantity is what counts, not quality. When a large number of farmers are trying to sell to a small number of licensed buyers, they have little bargaining power. They have no access to price information in other markets or about the pipeline of arrivals into the same market. As per some estimates farmers receive at best 45 paisa from every rupee spent by the consumer. Rest is pocketed by traders, CAs, transporters and retailers.

The traders and commission agents in every onion mandi (market) are an old boys’ club, where membership is hereditary and controlled by an intricate system of marriages and alliances. Collusion and price fixing are rampant. Onions bought from these wholesale traders/commission agents flow into grocery stores to serve over a billion consumers. There are also no laws to prevent retailers from charging what they please.

The government's swift action with a slew of measures to try to stave off market overreactions, such as setting minimum export prices, using public distribution systems to distribute high-priced food items, and coaxing states to respond firmly to hoarders has often helped the onion sector but the big discussion remains that government interference only helps cure the symptoms of the problems prevalent in the system and not the problem itself.

The Possible Solution

Some experts believe that the solution to the onion problem lies in a law that unites our 29 states into single agricultural market. A case in example for benchmark would be that of the European Union, which created a single agricultural market with 29 countries. The EU adopted a Common Agricultural Policy (CAP) as part of the Treaty on European Union and this 'CAP' seeks to increase agricultural productivity, ensure liveable wages for agricultural workers, stabilize agricultural markets, and assure availability of affordable produce throughout the EU.

Going back in history, when the Treaty of Rome established the common market in 1958, State intervention was a major feature of agriculture in the six founding Member States. If the principle of the free movement of goods was to apply to agricultural produce, ongoing State intervention notwithstanding, national intervention mechanisms which were incompatible with the common market had to be transferred to Community level; this is the basic rationale behind the establishment of the CAP. The objectives of the CAP are both economic and social and are intended to safeguard the interests of producers and consumers.

Although the CAP has reduced conflicts within the EU, it has to some extent led to the overproduction of certain commodities, including butter, wine, and sugar which has caused disagreements between the EU and some agricultural exporting nations (including the United States and Australia). Nevertheless, the EU continues to develop and enhance its Agricultural sector and the CAP has evolved significantly since it was created by the Treaty of Rome (1957). Substantial reforms over the years have moved the CAP away from a production-oriented policy.

Introducing National Agricultural Market (NAM) as per the above lines has seen improvement in states such as Karnataka. Similarly, e-NAM (electronic) will bring in the necessary transparency to curb the middle man-made and price issues. Policy makers should also work on structural problems such as providing skills so huge farm jobs can be converted to other sectors, providing irrigation and cold storage infrastructure to deal with monsoon dependency and other opportunities.