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Vol. XXIX No. 19, January 15-31, 2020

The Pope and the Price of the Fish

by A Special Correspondent

The raging price of onions reminds us of the saying in Economics that forms the title of this article. Till 1966, Catholics were advised not to eat meat on Fridays, so they ate fish instead. That year the Pope allowed meat on Fridays. The world demand for fish fell and shifted the demand curve downwards. The causes of the rise and fall of prices of food grains, pulses, oilseeds and vegetables are not that remote. They are direct. They are visible. They repeat every year. Our agriculture infrastructure and policy have the effect of penalising higher production. If there is a bumper yield, prices fall so much as to wash away more than the incremental revenue derived from the larger volume. The reverse happens in times of not-so-good monsoons. The tragedy is that while the farmer suffers by the price fall and fails to benefit by the price rise, the intermediaries make a killing in both situations.

Understanding the overall supply-demand and market structure for onions helps diagnose the issues to be addressed to avert periodic price crises. We shall identify each issue and see how it affects adequate and timely availability of onions to consumers, some of whom are in remote parts of the country and areas difficult in access. Numbers are rounded-off for broad managerial appreciation.
India produces 200 lakh tonnes of onion. Consumption is 170 lakh tonnes.

Because of the vastness of the market, it is inevitable that a portion of stock is stranded in warehouses and in transit, unavailable for consumption. With a logistical provision of, say, 15 per cent, the requirement would be 170 lakh tonnes plus 15 per cent, that is, 196 lakh tonnes. Thus, there is enough production to meet demand, but it is touch and go. If there is a bad monsoon or pest attack, a fall of, say, 10 per cent in yields results in a price rise of more than 10 per cent because demand for necessities is stubborn and inelastic to price. Price rises by, say, double the supply contraction, that is, by 20 per cent. The rush to hoard magnifies the rise further. The present area under onion is, therefore, not enough to absorb such shocks although, at first sight, there is an arithmetically adequacy. So, production of more onions must be promoted.

The biggest producing states are Maharashtra and Madhya Pradesh accounting for nearly two-thirds of the country’s production. The concentration of production area makes distribution a nightmare, often leading to severe shortages amid plenty. So, when more production is incentivised the focus must be on other potential areas to broaden the territorial production base.

Onion is raised in Kharif, late Kharif and Rabi seasons. The Rabi crop accounts for 75 per cent of the total production. This means 150 lakh tonnes out of 200 lakh tonnes arrive, like a tsunami, from end March to May every year. Imagine the disastrous price fall it triggers. When price falls precipitously – often below production cost which is about Rs. 5 per kg – farmers sell for a loss to recover desperately needed cash. That delivers a mortal blow to their desire and ability to raise onion the following season. This has two policy implications. One, there must be a Minimum Support Price but, without a sound procurement mechanism that can match the private agencies’ speed of buying and paying cash, it is a dead letter. Two, Maharashtra and Madhya Pradesh and other areas must be encouraged to plant more in the Kharif to smoothen the supply curve, even if this calls for a subsidy. The subsidy would be more than paid back by the benefits of fewer price flares.

India is the second largest producer of onions, a close second to China. It is ironic that we cannot avoid bouts of ridiculously high prices. We inferred that more production must be incentivised combined with territorial and seasonal diversification. Does producing more run the risk of rotting onions, if domestic demand cannot absorb it?

Domestic demand is increasing, fuelled by a growing population and increasing per capita income, the latter having its first effect on demand for better food. The National Horticulture Development Board (NHDB) has already estimated India’s onion shortfall at 1.6 lakh tonnes.

Onions are in demand the world over as a necessity that can bear a good price. India finds it difficult to import even small quantities like 20,000 tonnes in times of need. Ironically, India is among the four largest exporters of onions, with 24 lakh tonnes exported in 2016-17 and 14 lakh tonnes in 2017-18.
So, there is plenty of room for increased production. There is no risk. There is only opportunity.

Stop-gap measures of banning export and raiding onion traders have the reverse effect of scaring away future production and trading. Attacking the root causes, not the symptoms, can remedy the situation sustainably. The onion is a staple item but has been treated like a vegetable. Consumers, especially the lower income groups and the poor, are protected in some form or the other with respect to cereals, pulses, cooking medium and fuel. The most indispensable item, onion, is left out of the protection and the watch list. State governments must be involved in demand management of sensitive food items as they are best placed to watch market prices and take pro-active remedial action in a timely manner. Tamil Nadu has one of the more efficient public procurement and distribution organisations in the country to handle demand management.
There is a lesson to learn from another Asian country with similar climatic variances, susceptibility to shortages and consumer pressure – Indonesia.

Soybean is Indonesia’s onion. It is the staple item of food consumed by the poor and the rich. Any price rise leads to massive street demonstrations. Indonesian rulers are afraid of soybean price rise. President Suharto, powerful as he was, wanted to be kept advised of the daily soybean price, wherever he was. Strong steps were taken to gain self-reliance in soybean although “experts” advised him that import was cheaper from sources of higher productivity. He preferred the higher domestic cost, where production was within his control, to cheaper external sources outside his control.

Onion is a universal vegetable. It has no substitute. It has a longer shelf life compared to other vegetables. It is in demand every day of the year. Onion can be grown in rainfed conditions and in inter-cropping. It is not merely safe to produce more onion but also necessary and desirable given its export potential. The onion is not a problem. It is an opportunity.

Comments

  1. Narayanan says:

    “The onion is a staple item but has been treated like a vegetable… The most indispensable item, onion, is left out of the protection and the watch list. ”

    Why is onion as indispensable as cereal (rice/wheat) or cooking fuel? An odd claim considering it is possible to lead healthy, normal lives without ever eating onions.

    A few other objections:

    1. “Onion is a universal vegetable.” – you just objected to it being treated as a veg. Also Jains don’t eat it so not universal.
    “2. It has no substitute.” – what about leeks
    3. ” It has a longer shelf life compared to other vegetables.” – dried vegetables last much longer
    4. “It is in demand every day of the year.” – not on Diwali or Navratras days for many

    Regards,
    Narayanan

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