Why The Government Should Not Panic Over Onion Price Spike And Resort To Imports

On Saturday (9 November), the Economic Adviser in the Ministry of Consumer Affairs, which keeps a tab on prices of essential goods, wrote to government-owned Metals and Minerals Trading Corporation (MMTC) to import 100,000 tonnes of onion between 15 November and 15 December in order to tame its surging prices.

The move comes on the heels of onion prices zooming to nearly Rs 100 a kg in some parts of the country following damage to the Kharif crop, especially in Maharashtra.

According to the monthly report on onion by the Ministry of Horticulture, for October, the area under the crop is seven per cent lower this Kharif season compared to last year.

The Ministry said going by State agriculture directorates, 58 per cent of the crop has been damaged in Madhya Pradesh, 18 per cent in Karnataka and two per cent in Andhra Pradesh.

Though the crop in Maharashtra is ready for harvest, it has been delayed due to heavy rains. The average wholesale prices across the country in October at Rs 34.33 a kg was the highest in five years.

Arrivals in October were 8.08 lakh tonnes, at least 200,000 tonnes lower than in October last.

On Monday (11 November), most of the onions that arrived in Nashik, the hub of onion trade, were sold at Rs 48,000 a tonne. At the retail level in southern States like Tamil Nadu, this is likely to result in consumers paying around Rs 80 a kg.

In a parallel development, Income Tax Department officials checked the godowns and storages of onion traders at 15 locations in Maharashtra’s Nashik district to see if they were violating the stock limits.

As per stock limits fixed by the government for onion, wholesale traders cannot have more than 500 tonnes with them, while retail traders can store up to 100 tonnes only.

The stock limits, besides a check on export, were imposed since September when onion prices began to rise.

These are part of various measures taken by the government to tame surging prices.

A video has also surfaced in Tamil Nadu criticising the media and those raising a hue and cry over the current spike in the vegetable’s prices.

“People don’t mind splashing thousands of rupees on luxury items and going out to eat. But when it comes to paying Rs 80-90 for a kg of onion that can last for at least three days for a family, there is a big noise. What is wrong in farmers earning an additional Rs 10?” wondered the person on the video that is being circulated on WhatsApp.

How far can the government measures help in containing the rising prices of onion?

The Centre may not be able to control prices by importing onion.

There are a couple of reasons why.

One, the Ministry of Consumer Affairs wants to import 100,000 tonnes of onion within a one-month window from 15 November to 15 December.

This is a tough task since getting that much quantity of onion in the global market is doubtful. China and India together account for over 48 per cent of the world’s annual production of 97.9 million tonnes (mt).

China’s production is around 25 mt, while Indian production in 2018-19 has been estimated at 23.28 mt.

Production by other countries such as the United States (3.7 mt), Egypt, Iran (2.4 mt each), Turkey and Russia (2.1 mt) each are way below.

Pakistan is a good source for onion supply but there are no trade relations with it following the attack on Central Reserve Police Force (CRPF) personnel in Pulwama earlier this year.

In fact, India can barter its cotton for Pakistani onion.

The problem for the Indian government, currently, is finding 100,000 tonnes within a short span of time. The issue is complicated since the global market tends to spike when it knows that India desperately needs supplies of a particular commodity.

For instance, during 2006-07, global prices of wheat rose to a record when India began importing the foodgrain to meet its domestic shortage.

During 2007-08, the price of rice in the global market shot to a record after India decided to not export the commodity in order to meet domestic demand.

The issue here is at what price will MMTC be able to contract onion supply? Will the global market be blind to the developments in India? Rains have continued until last weekend and it could lead to speculation in the global market for further loss in onion crops. That could lead to a further spike.

Will MMTC be able to get onion at a price that will be lower than the domestic price? What about freight charges?

More importantly, will the imported onions have the same taste and pungency as Indian onions? For example, Chinese onion tastes differently and its pungency is also different.

On the other hand, the inspection by the Income Tax Department is a welcome move. It will keep the traders aware that they are on watch.

In 2011, these traders had formed a cartel to drive onion prices higher.

According to the Competition Commission of India (CCI), a study undertaken by the Institute for Social and Economic Change, Agricultural Development and Rural Transformation Centre in Bengaluru, revealed that onion traders dictated the market and a few big traders with well-connected networks played a big role in hoarding the vegetable, thus driving the prices higher in December 2010.

The study also found collusion among traders in Maharashtra and Karnataka in selected markets. That way, the inspection by the Income Tax authorities is justified. Hoarding of onions has also been reported from Delhi during Dasara and Diwali.

There are two positive developments that the government can look forward to in containing the spurt in onion prices.

According to the Ministry of Horticulture report, onion harvest is in full swing in Rajasthan, Andhra Pradesh, and Karnataka.

Harvest has begun in Madhya Pradesh and Gujarat. It is set to begin in Maharashtra. These will result in arrivals increasing across the country and consequent moderation in prices.

The other positive development is that the area under late Kharif crop is expected to be higher than last year, with transplantation of the seedlings getting over. Arrivals of this crop are expected next month.

Therefore, it appears that prices are likely to ease over the next couple of weeks. At this time, when arrivals are set to peak, it is not a wise decision to import onions since the grower could be affected as prices can crash.

Even if prices don't crash, the Centre should not panic.

Assembly elections have been scheduled for Jharkhand and will soon be held in Delhi. The Bharatiya Janata Party might not face problems due to higher onion price in Jharkhand. As regards Delhi, the prices will likely come under control by the time the election schedule is announced.