Onion Crisis Reveals How Little the Government Can Do When the Chips Are Down

Even if we had enough buffer stock, which we don't, the Centre has no delivery mechanism. The only viable alternative is to create modern storage infrastructure, but who is interested in doing that?

It appears that it is the humble onion which is finally teaching urban India’s middle class of the perils of climate change. The deniers may still not want to believe it, but the current crisis of high onion prices may well be an early indicator of the shape of things to come.

Now that the retail price of onion continues above Rs 100 per kg, the government is on the back foot. And it is running out of options. There is not much that it can do, except wait for late kharif crop to hit the market.

As late as August 29, 2019, the Ministry of Agriculture estimated the production of onion in crop year 2018-19 (July-June) at 23.28 million tonnes, slightly more than last year’s production of 23.26 million tonnes.

It is the rabi onion, grown in October-March, which is about 65% of annual production and is stored for consumption from April to October. Untimely and excessive rains in Maharashtra, Madhya Pradesh and Karnataka damaged not only the stored rabi onion (stored by farmers and traders) but also the standing kharif crop.

It should be remembered that the production of onion has increased by about 40% from 16.81 million tonnes in 2012-13 to 23.48 million tonnes in 2018-19. In fact, due to high production, onion farmers suffered huge losses, especially due to crashing prices after demonetisation in November 2016.

Also read: The Onion Price Rise is Linked to North Pakistan’s Unusually Warm Weather

In the kharif 2017 season, the Madhya Pradesh government had to procure onion at Rs 800 per quintal, which was later disposed off at Rs 2-4 per quintal. In the process, the state government suffered a loss of Rs 785 crore.

At the time of harvest of the rabi crop in March-April 2019, there was no indication of any shortage or damage to the crop. The crop was quite good and there was no expectation of an abnormal price rise. As a result, government agencies purchased only 57,372.90 tonnes from the price stabilisation fund (PSF). In a normal year, this was sufficient to keep the market prices at normal levels until September and October, when kharif onion arrives in the market. Unfortunately, the rains damaged the private stock of onion and did not spare even the government stock (with Nafed) and it seems that 30,672 tonnes onion was wasted.

This year, onion was not the only crop damaged by excessive rains. Good monsoon rains in August and September had persuaded the Solvent Extractors’ Association (SEA) to estimate soybean crop to be more than 10 million tonnes, just a little lower than 10.3 million tonnes in 2018-19. However, SEA now estimates that the crop may be only about 9 million tonnes.

However, neither the media nor the government seem to be too worried about the losses suffered by soybean farmers and its possible impact on domestic production of edible oils. One reason is that there is ample availability of cheaper palm oil from Malaysia and Indonesia.

Watch: Why Did Onion Prices Rise Drastically?

Similarly, sugar production in 2019-20 (October-September) is estimated to be just 26.85 million tonnes as compared to record high 33.16 million tonnes in the previous year. With high carryover stocks, the government is not worried about price rise and it is only the sugar cane farmers whose incomes would go down.

Similarly, trade estimates that the production of kharif pulses in 2019-20 may be at least 6 lakh tonnes lower than the Government’s first advance estimate of 82.3 lakh tonnes. This is also the impact of excessive rains in Rajasthan, Maharashtra, Madhya Pradesh and Karnataka. So far, losses suffered by farmers growing pulses have not received much attention by the Government.

So, what is the lesson from price rise of onions?

It has to be understood that monthly domestic demand of onion is about 15-16 lakh tonnes. So a buffer stock of 10 lakh tonnes cannot meet even one month’s demand of the entire country. In any case, there is no infrastructure, except the public distribution system, to deliver onions to consumers and no government would like to take on the further burden of subsidy by supplying it through PDS, as it would be difficult to discontinue the supply once it is started. At best, the government can sell onions from buffer stocks in big cities, where some alternative channels of distribution are available, for example, Mother Dairy booths in Delhi.

So the only viable alternative is to create modern storage infrastructure which will reduce the losses of rabi onion. Presently it is estimated that 30-40% onion is lost in storage. Under the Mission for Integrated Development of Horticulture, the Union Ministry of Agriculture provides grant for low cost storage structures of 25 tonnes capacity. Since 2005-06, only 4.3 lakh tonnes capacity has been created while the production of Rabi onion is about 15 million tonnes. Maharashtra alone produces about 88 lakh tonnes onions but it has created storage capacity for only 53,745 tonnes. It is no wonder that even Nafed could not safely store its onion and suffered more than 50% storage loss due to excessive rains and floods.

Also read: Centre’s Measures to Control Onion Prices Will Hurt Farmers

In the Indian Council of Agricultural Research, there is a Directorate of Onion and Garlic Research with 25 research centres across India, and yet there is no cold chain technology for storage and transport of onion. Production of onion has increased in non-traditional states like Madhya Pradesh but the organised private sector has not invested in the development of modern storage facilities as there is always a threat of action under the Essential Commodities (EC) Act.

For a long-term solution, the government should challenge scientific institutions to come up with cost-effective storage technology which can reduce losses in storage and transportation. At the same time, the use of processed onion in the form of paste and flakes may be promoted so that the private sector can buy at the time of harvest and process it for use during the year.

A buffer stock of about 10 lakh tonnes may also help the government prevent unscrupulous elements from hoarding. The EC Act alone cannot solve the fluctuation in onion prices.

Siraj Hussain is a former Union Agriculture Secretary and is currently a visiting senior fellow at ICRIER.