The Onion Economics: Weather Gods Drive Prices, But Our Import-Export Policies Do No Good Either

Onion prices crossed Rs. 100, on average, in most retail markets and got bought and sold at over Rs. 200 kg in some places during the last few weeks.

Onion is attracting so much of public, media and government attention as if India were in the midst of a major economic crisis, bigger than slowing Gross Domestic Product (GDP) or falling investments. Should the nation be fretting over onion prices?

India produces around 230 lakh tonnes of onion, on an average, 18 kg of onion per person a year.

India produces a little over 20 per cent of global onion production. It is the second largest producer after China, which produces about 25 per cent of total onions. Egypt and USA are the third and fourth largest producers, each with about 3-4 per cent of the global share.

India consumes only about 60-70 per cent of the onions produced. Rest is either exported, used otherwise or wasted. India is the largest exporter of onions in the world, earning over Rs. 3,000 crore in 2018.

China, United States of America and Egypt are the three next largest exporters of onions, earning about less than half of what Indian exporters earn every year.

India is also the lowest-cost producer of onion; onion prices in India usually are the lowest in the world.

If India produces so much of onion, there is so much surplus of onions produced in India and India is the largest exporter of onion in the world, why do we have prices shooting up sometimes?

Why do we also have this frenzy and angst forcing the government to take emergency measures like importing in a hurry and clamping down exports?

India has three crops of onion in a year. Rabi crop, which is harvested in March-May is the largest. A little over 150 lakh tonnes of total onion production of 235 lakh tonnes last year was produced in this crop season.

This crop is quite stable in terms of production with very little variation from year to year (except in the years when farmers decided to cut down on planting on account of extremely low prices in the year before).

This crop is ‘storable’ also and farmers have developed on farm storage to stock this crop and release it gradually every month until September-October.

India has two smaller crops of onion — Kharif sown in July-August and harvested in October-December contributing about 3,035 lakh tonnes or about 15 per cent of the annual crop production, and late Kharif, sown in December- January and harvested in January-March, producing 40-50 million tonnes on an average or about 20 per cent of annual production.

These two crops see varying production depending upon monsoons, floods, drought or other climatic catastrophes.

While bulk of the onion crop is produced in Maharashtra, Madhya Pradesh and Karnataka (almost 2/3rd of annual crop), the shrillest cries are heard in Delhi and other northern cities when the onion prices shoot up.

Wholesale onion prices in Delhi in the first five months (March-July) of the flush season (March-September) in last four years (including current year 2019) averaged less than Rs. 10 a kg, recording less than Rs. 8 per kg in almost half of these months.

Onion prices start rising from August (Rs. 35 a kg in 2015, Rs. 20 a kg in 2017, Rs. 17 a kg in 2019) in the wholesale markets of Delhi if trouble is anticipated in the Kharif crop or the farmers decide to cut down on kharif showing, having received very low prices for their preceding Rabi crop.

As the crop demand and supply situation gets disturbed for ensuing months (situation gets more difficult if the late Kharif crop also suffers), the prices start rising much more menacingly.

If the Kharif turns out to be better than anticipated in September-October, or there is good sowing for late Kharif, the onion prices start reverting to their lower levels from November-December itself.

In Delhi’s wholesale markets, onion was sold at an average price of Rs. 34.80 and Rs. 38.11 in 2015, but declined to Rs. 21 in November and to less than Rs. 13 in December 2015.

It did not happen this way in 2017. Prices started rising in August 2017 as per the usual pattern when there was trouble in monsoon rising from Rs. 7.95 per kg on an average in July 2017 to Rs. 19.56 in August and then to Rs. 25.71 per kg in November and Rs. 30.49 per kg in December 2017. This year again in 2019, onion prices rose to Rs. 16.63 per kg in August and then to Rs. 28.46 in September and to over Rs. 30 in October.

Pattern of onion prices over the last five years, and even earlier, is so stable and hence so predictable. The single most responsible reason for the rise in onion prices from August to December is vagaries of weather.

Traders might take advantage of the situation to make some quick money but they are not responsible for demand-supply gap in months of shortages, which is entirely weather related, sometimes accentuated by the farmers receiving too low onion prices.

Onion is not the most nutritionally rich or necessary food to have either. It has about 90 per cent of water and some flavour. What is the problem if some people have to pay for higher prices or have to cut down its consumption temporarily?

Indian farmers receive, on an average, the lowest prices in the world for their onion produced. Why do we have consumers unhappy some times and farmers generally?

Our distorted policies to handle onion production, storage and exports-imports are primarily responsible for this state of affairs.

Policy makers are primarily driven by the instinct and intent to keep consumers happy. Consumers must receive onions at less than Rs 15-20 per kg! To ensure this, we have adopted a very restrictive and ad-hoc export policy.

Two instruments are used — fixing a minimum export price (MEP) and banning the exports outright.

MEP instrument is deployed as soon as there is a feeling that onion prices might shoot up beyond Rs 20 a kg in the wholesale markets. An MEP towards the higher end of global prices is fixed to discourage farmers/traders to export.

Whenever the wholesale prices are likely to go beyond Rs 30-50, an outright export ban is put in place.

When prices crash, usually when new Rabi crop arrives, the restrictions are relaxed.

This policy needs to be simply junked. Free exports and imports of onions should be permitted without any MEP. The government should guarantee that no ban on exports would be imposed.

If this policy is adopted, Indian farmers would actually increase the area under onion crop in Rabi, develop more stable and strong export markets and gradually realise global onion prices.

Wholesale prices might move from the range of Rs. 8-10 in the Delhi market to Rs. 12-15 during the months of March-July, but these will be much more stable prices throughout the year.

Open imports by farmers groups and private traders (as against government agencies rushing to make some desperate purchases when onion prices start shooting up and then try to provide to select Delhi and some other urban consumers at a subsidized rates) will ensure that onion prices for consumers even in the volatile season (September to December) are stable and low.

Consumer retail inflation data for October was released recently. Retail inflation rose to 5.54 per cent in November and 4.62 per cent in September.

This was primarily on account of vegetable prices which shot up to 36 per cent. With the weight of 7.46 per cent in this retail index, vegetable price rise alone contributed a whopping 2.68 per cent of the 5.54 per cent increase or about 48 per cent of total increase in consumer prices.

Excluding this, which is almost entirely driven by short term factors, retail inflation is less than 3 per cent.

Our sensitivity to inflation is very high. As October inflation data crossed 4 per cent, RBI decided to pause cutting of policy interest rates. Core inflation in the wholesale price index and retail inflation, excluding the vegetables, is very well within the range of 2-6 per cent inflation fixed by the government in 2015, which the RBI is mandated to ensure.

Paul Volcker, who tamed inflation in the US, died last week on 8 December 2019. The inflation is almost dead in many parts of the world. A number of advanced countries are spending their fiscal and monetary firepower to somehow raise inflation to 2 per cent a year. Yet, they are not succeeding despite stacking up a lot of public debt and also expanding the balance sheets of the Central Banks in pursuit of quantitative easing.

India has a lot of growth to achieve for providing a decent quality of life to its citizens. We got on to an inflation targeting regime very late in the day, when many countries, which adopted inflation targeting having seen Volcker’s tighter monetary policies succeeding in taming US inflation of high two digits, have by now increasingly discarded the same.

The world today is different from what it was in the 1980s. Agriculture and even industrial goods production globally is in good balance of demand and supply, in fact for many products, supply is exceeding demand. There is unlikely to be an excessive rise in prices if we don’t follow a very loose monetary or fiscal policy.

Some odd episodes, like the current onion episode, will keep on happening on account of temporary factors. Let us not fret over these. Instead, we should build stable agriculture trade policies for serving farmers and also consumers. Let us focus more on growth than inflation.

(This note was published by former Economic Affairs Secretary Subash Garg on his Linkedin page)