How the ubiquitous onion exposes weaknesses in India's farm policies

Fractured markets accentuate the demand-supply mismatch typical of this dining staple

It is not only one of the most common vegetables in Indian households, but perhaps is also an epitome of what is wrong with the country’s agriculture and policies that govern it.

Onion, which is cultivated in small landholdings in limited areas but consumed almost uniformly across the country, is produced using very rudimentary methods and output-forecasting procedures. Very small quantities of the vegetable, which has a limited shelf life, are processed in the country. The bulbs are highly vulnerable to the vagaries of nature and are frequently subjected to curbs on free trade, mostly in the form of stock holding limits, export bans or similar instruments.

From time to time both farmers and consumers, who represent two ends of the value-chain, have often felt the pinch of falling or rising onion prices because of fractured markets.

In short, if there is one crop which signifies the broken architecture of Indian agriculture, it is onion.

A balancing act gone wrong

A case in point is the recent first advanced estimate of 2019-20 (July-June) horticulture crops.

Estimates released few days back show that India’s onion production in 2019-20 is projected to be seven per cent more than in 2018-19.

The projections have come just months after another government estimate expected a 22 per cent fall in kharif and late-kharif onion harvest due to unseasonal rains. This assessment was till November.

Now, the two numbers reveal a very interesting pattern and give rise to the question whether one wing of the government was unaware about what the other wing was doing.

A section will assert that the 2019-20 estimates could have been prepared expecting a very big rabi crop, which incidentally is the biggest season for onion, but to say that the jump in output has been estimated without considering the damage numbers is difficult to believe.

Onion is largely cultivated at three different times in India.

The kharif crop is harvested in the October-December period, the late kharif crop in the January to March period and the rabi crop harvest usually starts from March-end and stretches up to May.

The second question is that if the damage numbers weren't authentic enough, then why did the government go into an import overdrive and whether it pressed the panic mode without sufficient cause. Did it over-react on the crop damage numbers and could it have waited a few more weeks for the markets to cool down before going for large-scale imports?

All these issues raise questions on why India didn't develop a robust crop information and forecasting system for so many years despite having made such big technological advancements in most other spheres.

The end result of all these is that, as of middle of January 2020, India is saddled with over 16,000 tonnes of imported onions, which the government purchased at the rate of Rs 49-58 a kilogram from various countries. States aren’t willing to purchase much of this as domestic prices have slumped by over 40 per cent in the main mandis of Maharashtra during the past few weeks.

This leaves the government with just two options -- dump the imported onion in the domestic market, further driving down prices or open exports and risk another round of price increase. 

Latest reports said that around 7,000 tonnes of imported onion now lying at the ports are on the brink of getting damaged. Assuming that all this produce was imported at a price of Rs 49-58 a kilogram, onions worth almost Rs 4 crore are waiting to get damaged.

Data showed that domestic onion arrivals had started falling in September in the local mandis and average arrivals in September 2019 were 27 per cent lower than the same month last year, which rose to 31 per cent fall in October 2019 and then 28 per cent in November, pushing up prices by almost 51 per cent during that period.

The first batch of imports started coming in from middle of a full three months after the market arrivals started dwindling.

The official explanation of this is that imported onions comes in cold containers and it takes almost a month for them to be brought to moderate temperatures or else the consignment can get damaged.

But the question that remains is this: Could this problem of plenty been avoided had the government anticipated the extent of crop damage and signed import contracts on time? Did it have a clear assessment of the quantum and quality of onions stocked its warehouses? 

“Look, the limited purpose of imports was to cool market sentiment, which it has done effectively and brought down retail prices from almost Rs 160 a kilogram to around Rs 60-70 now. Now, what will be done with the imported stocks that have already arrived is yet to chalked out. If nothing works, then we will sell the imported onions at a cheap rate in the open market,” a senior official who has been involved in the import process said.

Traders' dilemma...

Another revealing factor is the export of onion. Data sourced from government’s own report shows that between January and October 2019, Indian traders exported 2.6 million tonnes of the vegetable (31 per cent more than last year) at a massive discount of just around Rs 19 per kilogram.

Had they waited a few months, the price they would have got in the domestic market would have been a mind-boggling 700 per cent more than the rate at which they exported.

Some experts said the fact that Indian onion traders preferred selling their stocks outside India at a rate far less than what they could have got in the domestic markets points to the fact that they feared a crackdown on their stocks as soon as prices rose and hence opted to export instead of selling in the domestic market.

“Draconian laws like Essential Commodities Act have long outlived their utlility and need a serious relook, or else traders and market participants would continue to export instead of selling in the domestic market,” a senior official from NITI Aayog, the government’s main think-tank told Business Standard.

He argument seems to hold water. As soon as onion prices flared up in the domestic market, the government followed the usual practice of first banning exports, and then used the Essential Commodities Act to impose limits on the amount of stocks each trader could hold.

At present, retail traders can’t hold onion stocks in excess of two tonnes while wholesalers can’t hold it over 25 tonnes. This limit was brought down from 5 tonnes and 50 tonnes within a few weeks.

...And traders' delight

It isn't as if traders have always had a bad deal. When prices spike, they do tend to make a cut.

In fact, an analysis by the present government, soon after it took office in 2014, showed that traders pocketed a staggering Rs 8,000 crore by willfully holding on to their stocks in the months of crisis, depriving farmers of their due price.

Onion prices tend to rise to rise in the June-to-September period, as rabi crop gets exhausted while the kharif crop takes time to reach the market.

This period got extended in 2019, as much of the standing kharif and late-kharif crop suffered extensive damage due to heavy rains.

All this is despite the fact that numerous reports, studies and committees concur that onion prices are generally prone to extreme volatality after every three years despite a healthy rise in production.

Bridging the supply-demand mismatch

India’s onion production has risen by an staggering over 13 per cent in the last 13 years since 2000-01, unmatched by any other food crop in recent times.

However, domestic and overseas demand for the crop seems to be outpacing supply.

Per capita availability of onion has risen to more than 13 kg in recent years from four kg in 2002-03, an increase of 12 per cent per annum.

All these factors have put India in a peculiar situation that makes it the world’s second largest producer of onions, after China, but one which sees maximum fluctuation in the crop’s prices.

But, as noted agriculture economist and Infosys Chair Professor for Agriculture in the Indian Council for Research on International Economic Relations (ICRIER), Ashok Gulati,  noted in an article published some years back, like always government policies have been ad-hoc and puzzling when it comes to onion.

He advocates promoting modern cold-storage facilities in a big way in states like Madhya Pradesh, which has emerged as big onion producer after Maharashtra and Karnataka. He asserts that in traditional storages, almost 40 per cent of the crop gets damaged.

He also advocated a trade policy for price stabilisation and encourages the setting up of onion dehydrating units and promoting demand for dehydrated onions among large consumers (restaurants, fast food chains, army, hospitals, and such like).

NITI Aayog member and eminent economist, Ramesh Chand, in a blog published in 2015, had suggested promoting onion cultivation in states like Uttar Pradesh and popularising Kharif production as well.

When it comes to onions and the crisis that it faces, the government is not short of good intentions, advice and reason. But it is high time it started acting on some of them. 

Onion production (in million tonnes)
Year	Output	Year	Output
2015-16	20.93	2018-19	22.81
2016-17	22.42	2019-20*	24.45
2017-18	23.26
*As per first advanced estimate released this week; Source: Ministry of Agriculture