What is behind the Recurring Onion Price Spikes?

Varshini Sridhar

To Indians, nothing can bring more tears to the eyes than an onion price hike. After all, it has led to the fall of governments and inflicted debilitating losses on farmers in the last few years. But what really baffles policy analysts is its recurring nature and most importantly, consumer sensitivity to its price hikes.

Onion, like any other item, derives its price through market forces. Typically in the event of a shortage, the increase in demand would be fixed by a rise in price and a change in consumption patterns. However, in the Indian case, that is not allowed to happen. Every time when there is a price increase, the government steps in to distort the market price by imposing stock limits and export bans, thereby preventing the market from functioning as it is.  

The government’s excessive market intervention creates two types of distortions, one on the demand side and the other on the supply side. At the demand level, consumption choices are distorted as the government keeps the price at an artificially low level as opposed to the demand-supply-driven price. That means every time when there is a drastic reduction in supply, consumers never face the actual price. Over time, consumers become habituated to the artificial price introduced by the government and react sensitively in the face of a price increase.

In the long run, supply decisions driven by market price can also be altered as the government-distorted price discourages farmers from producing more. This further makes agriculture seem less remunerative and unsuitable for investment. So, what leads the government to consistently pursue such a knee-jerk response? It is consumer resentment. Politically, controlling food inflation has direct effects on votes. According to the International Food Policy Research Institute’s study, while onions’ share in the overall inflation basket and vegetable basket is 0.6 per cent and 10 per cent respectively, its contribution to food inflation is around 2 per cent. The government cannot risk waiting until inflationary pressures hit the average consumer. Keeping the middle-class consumers in mind, it typically focuses on stabilising consumer prices temporarily and tries to appease farmers through incentives and subsidies during budget presentations.

But the onion price paradox is not a simple problem of demand and supply. Behind this, is a web of interrelated issues, the critical one being storage. Until now, the Essential Commodities Act (ECA) hampered private investment in cold storage facilities and warehouses. But what makes storage so important?

Onions are harvested in three seasons, that is, Kharif (October-December), late-Kharif (January-March) and Rabi (March-May). Seventy per cent of the onion production is contributed by Rabi season, and making onion available in the market between March and May and further until October in the form of stored onions. That means any disruptions in its supply or the lack of adequate storage infrastructure will lead to shortages and price rise in the critical period between August and October and well until the next harvest.

Because of onions’ sowing and harvesting seasons, nearly 30-40 per cent of wastage happens in the absence of post-harvest storage facilities. Last year, while the government imported 1 lakh metric tonnes of onions, NAFED wasted more than 30,000 metric tonnes due to the lack of cold storage. That is equivalent to 50 per cent of its buffer stock. Moreover, 75 per cent of the onion production in India is accounted for by just five states. This introduces additional challenges in storing, distributing and supplying onions throughout the country.

Recently, onion was removed from the purview of the Essential Commodities Act. However, amendments to the farm bills will not resolve issues like storage until the government plans for the problems that may arise from the new arrangements. For instance, Bihar repealed the APMC Act in 2006. But 14 years later, neither has the storage infrastructure improved nor have farmers been able to realise better prices. According to NCAER’s study, Bihar’s private warehouses, where most farmers store their onion and potato produce, burden farmers with higher rental charges, a consequence of demand and supply mismatch. High operating costs induced by inadequate infrastructure, outdated technology and inconsistent power supply are major roadblocks to improving storage facilities. Right institutional mechanisms ranging from improved infrastructure and favourable land policy are necessary to create more productive agriculture.

Not to forget, India is the second largest onion producer in the world, right after China. Out of the 22.43 million metric tonnes produced annually, only 15.5 million metric tonnes is consumed. That is tantamount to 70 per cent of the total production. The timing of the late Kharif harvest is advantageous for exports as many countries abroad face a shortage during this time. But the government’s frequent export bans makes it hard for farmers to leverage India’s position as an onion producer globally. Despite the amendment to ECA, the government imposed an export ban in September. But onion price continued to rise from Rs 30 per kg to Rs 51 per kg. Ultimately, the government’s short-term export-import policies for onions benefit neither the consumer nor the farmer.

In August, while consumers paid more than Rs 20 per kg, onion growers received merely Rs 6-7 per kg after incurring a cost of Rs 12-13 per kg. To resolve this paradox of onion price hikes, the government needs to adopt a more long-term and integrated approach that at no point puts farmers on a lower priority.

Varshini Sridhar is Project Assistant at CPPR. Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.

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