When Onion Prices Bring Indians to Tears

Background

Onions grow in a variety of soil conditions, and their bulbs can be harvested from seeds in as little as three months. In India, onions are cultivated over three crop seasons: Kharif (May to September), early Kharif (August to February), and Rabi (October to April), with the bulk of production coming over Rabi, after the summer monsoons. India’s onion production is concentrated in the country’s central and western states with three states, Maharashtra (which accounts for over a quarter of production), Karnataka, and Madhya Pradesh being responsible for more than 50 percent of the country’s production.

India has significantly ramped up onion production in the last half century. In 1963, it produced nearly 1.3 million tonnes of onions; 50 years later, it produces around 20 million tonnes a year (approximately an annualized growth rate of 11 percent). India produces more onions than entire continents, including Europe, North America, South America, and Africa; only China produces more, at around 22 million tonnes.

China and India are major onion producers; these two countries produce more than major continents.

The production increases in India can largely be explained by an increase in the amount of land it uses to produce onions. Between 2000 and 2013, India increased the area harvested from 450,000 hectares to 1,217,000 hectares. Meanwhile, the onion yield per hectare has improved as well. In 2000, around 10 tonnes of onions could be harvested per hectare; most recent figures available indicate that the yield has increased by over 50 percent, to 15.86 tonnes per hectare. In addition to increasing the use of fertilizers, the country’s producers have increased yield by using new planting methods, improving pest control, adopting new onion varieties.

India's onion production has grown because it has significantly added area harvested; it has increased yield as well, at a slower piece.

Still, the yield increase isn’t particularly impressive in the context of other large producers. India’s yields are still significantly behind that in South Korea and the United States—currently the world’s leaders in onion yield. In most recent data available, these two countries respectively produced 64.58 tonnes per hectare and 54.47 tonnes per hectare.

South Korea and the United States are leaders in onion yield. India's yield is lower, comparable to the levels in Bangladesh and Pakistan, and slightly lower than China's.

India’s low yield is caused by a variety of problems. Unable to access irrigation systems, India’s farmers usually have to rely on monsoons to produce the water levels they need. In addition, most onion farmers are smallholders who are not always able to improve cultivation methods or make significant investments in improving production.

The growth of onion production in India has accompanied a growth in consumption. As Indians get richer, more people have been able to eat the vegetable more frequently. In addition to traditional dishes, gonions have been added to other foods too. Greater interest in fast foods and ready-to-eat meals in India has increased demand for dehydrated onions. Similar growth trends are found in other countries around the world in which onions are processed into more foods.

Onion price volatility in India

In 1980, Indira Gandhi’s Congress Party swept into government in part by turning the high price of onions into a campaign issue. At rallies, Indira Gandhi waved garlands of onions, and her victory led her to refer to the election as the “Onion Election.” The high prices of onions have also taken down two state governments, and rising prices have induced nervousness in both current Prime Minister Narendra Modi and his predecessor Manmohan Singh. Both have been active in rolling out new policies in response to price hikes.

Nonetheless, onion retail prices remain highly volatile. Over the last four years in the Delhi region, retail onion prices were lowest in July 2012, at 15 Indian rupees per kilogram (or about US¢ 30 a kilogram in 2012 prices). In 15 months, that figure had more than quadrupled, reaching a high of 66.21 Indian rupees per kilogram. Unfortunately, this is a phenomenon that Indian consumers have been forced to get used to. The country is beset by massive price increases, followed by a decline, every few years.

India's capital city has had to deal with significant price volatility.

Onion prices are volatile due to a variety of factors. For one thing, production is highly seasonal, and onions don’t go to market in consistent quantities throughout the year. Given general inadequacies of storage facilities, and the fact that India severely limits onion imports, production fluctuations significantly affect prices. The supply of onions typically declines and prices trend up between July and September, over the monsoon season and before major harvests.

The government is apt to cast blame on unpredictable weather to explain production crunches. In years like 2014, the summer monsoons brought slightly lower rain than average; in more recent years, more typically it is too much rain rather than too little that has hurt onion production.

Onions cultivated in the Kharif, or wet seasons, tend to remain fresh for not much longer than a month; onions produced in the Rabi season tend to last longer, up to six months. In either case, especially the Kharif crop, not enough storage facilities exist to make sure that they keep well, a fact not helped by unusually high rains in recent years. The lack of adequate storage facilities and a well-developed infrastructure network permit significant post-harvest losses. According to Sharad Pawar, a former minister of agriculture, more than 40 percent of vegetables and fruits in India rot before they reach consumers. Indian consumers are considerably at the mercy of seasonal production.

In addition, onion producers are held back by another distributional inefficiency. By law, farmers are prohibited from interacting directly with buyers, and instead have to deal with licensed middlemen. The Agricultural Produce Marketing Committee Act was a series of statutes that came into effect in the 1960s that created classes of agricultural intermediaries between farmers and consumers.

Before a vegetable can go from farm to market, it may have to pass as many as four layers of intermediaries. Onions and other fruits and vegetables have to be loaded, repacked, and sorted between each of these middlemen; in a price hike, each of them applies their own markups. In addition to raising fees and reducing transparency, the need to go through intermediaries increases the risk that vegetables will rot before they get to market.

The government also frequently points to speculators to explain price hikes. When prices rise, officials decry hoarding behavior, and then conduct well-publicized raids on warehouses in which the vegetables are stored. In response to these indignities, onion sellers have organized strikes to protest raids. Nonetheless, the government has not given up the practice, especially through the big price hikes in 2013 and 2015.

The Indian government’s efforts to reduce volatility

In response to various price hikes and supply shortages, and given that the government severely restricts imports, the government has favored increasing domestic supply through export controls. These policies usually have had mixed effectiveness, and the government may be able to reduce volatility by making greater investments in increasing production and improving storage over the long term.

Although India’s government highly values a stable supply of onions, it permits very few imports to enter the country. Trade in onions, especially imports, is highly regulated. Even when the government foresees that weather will reduce the size of a harvest, it tends to permit imports only after prices start to rise. The usual reason the government offers for restricting imports is that it wants to narrow its current-account deficit.

India's onion imports are small and infrequent. The government highly restricts imports, and allows them only when it's worried about production.

Imports of onions require government approval and are organized by state-run trading companies, also known as canalizing agencies. When prices are high, these agencies are authorized to seek overseas suppliers to increase domestic supply. Even if these companies manage to find onion supplies on short notice, shipments have historically arrived too late to prevent a price spike.

The Indian government more frequently resorts to restricting exports in order boost domestic supply. In addition to short-term bans, the government more often relies on minimum export prices (MEP) to reduce the amount that gets shipped overseas. It has raised MEP a number of times over the last decade, including in 2012, 2013, 2014, and 2015. Occasionally, these MEPs serve the same function as export bans, given that producers aren’t able to find overseas buyers at prices well above market prices.

India is a major onion exporter. But their levels can dip significantly when the government raises minimum export prices.

These interventions on distribution have had mixed effects as they have been usually enacted too late to control for price hikes. Even when the government decides to import onions, the supplies rarely arrive in time to relieve consumers. Instead, these interventions may hurt long-term onion production, blocking producers from taking advantage of profitable exports and higher margins. Onions from India are generally well-regarded in overseas markets, and command a price premium over onions from Pakistan and China. When the government acts constantly to keep prices of onions down, producers have less incentive to make significant investments in increasing production.

Instead of resorting to trade restrictions, the government might do better for consumers by investing in storage and distribution infrastructure. Increasing storage capacity could help reduce some of the volatility in the markets and create a buffer stock of the vegetable that can be built up during peak supply and steady prices until the next harvest reaches the market. Further, modern storage infrastructure that prevents condensation which leads to rot would reduce post-harvest losses, which at 40 percent, are significant. As part of infrastructure development, investment in greater irrigation capacity would reduce farmers dependence on seasonal rains. In addition, the establishment of more processing facilities would allow more onions to be processed during gluts to later be consumed during shortages. Turning the less aesthetically pleasing onions into pastes and sauces would reduce the waste of otherwise fine onions.

Given that the government is leery of importing onions, another way to address supply shortages is to increase production. Although India is a top producer of onions, its yield levels are significantly behind that of other major producers. Finding ways to get the yield closer to levels found in South Korea or China would allow it to significantly increase output without using more land. In addition, reform of the Agricultural Produce Marketing Committee Act may reduce the number of middlemen, and therefore allow more farmers to capture the value of the crops they produce.

Conclusion

Onions are so potent that their prices have become a yardstick of good governance. It is not just Indira Gandhi’s Congress Party that has turned their price into political weapons; the politicians from the opposition Janata Party has relied on it as a campaign issue too. Meanwhile, in spite of decades of campaigns, the prices of onions still tend to spike after production disruptions. The country’s import restrictions, poor execution of interventions, and lack of adequate storage make consumers too dependent on cyclical supply. With very high post-harvest losses, as well as low yield levels, supply is not sufficiently high to reduce the possibility of price spikes. With less loss and more output, India would be able to have a greater supply of onions available so that prices won’t have to increase so precipitously.

Consumers who wish for price stability may have reasons to be hopeful. The state government of Maharashtra, the country’s largest onion-producing state, has amended the APMC act that imposes many layers of intermediaries between farmers and consumers; if other states follow suit, more farmers will find greater transparency and better prices for their goods. Another state government, the central state of Madhya Pradesh, has invested in building storage units in Indore. More efforts like these, combined with certain trade liberalization policies from the central government, could give Indians the price stability in onions they’ve long been promised by politicians.