The main reason is complete absence of policy and institutional response to significant changes in demand for onion in the recent years
By Dr Ramesh Chand, Director & Raka Saxena, Senior Economist
National Centre for Agricultural Economics and Policy Research, New Delhi
Onion price shocks are hitting India frequently and they are getting severe. The main reason for this is complete absence of policy and institutional response to significant changes in demand for onion in the recent years. This has left the field open for exploitation by onion traders who are not missing any opportunity to exploit situation arising out of small shortage in production and rigidity in demand.
It is ironical that India faces frequent and severe onion price shocks despite record growth in its production in the country. Onion production has risen from below 5.5 million tonne till 2002-03 to above15 million tonnein the last three years. The country experienced annual growth rate of 13.36% in onion production during last 13 years since 2000-01. No other food crop in India shows this type of spectacular growth in the recent years. However,domestic and overseas demand for onion seems to be outpacing growth in demand. Per capita availability of onion has increased from 4.0 Kg in year 2002-03 to 12.6 Kg in year 2012-13, showing an increase of 12 per cent every year.
This growth in per capita demand for onion reflect mind boggling preference of Indian consumers for onion.
Despite a very sharp increase in per capita availability of onion, its real prices have been moving on a rising,though fluctuating,trend. Large expansion of eating joints, outside eateries, snack corners, restaurant in the recent years has added considerably to increase in per capita onion consumption as onion is the main ingredient for attracting consumers to spicy food. According to estimate of NCAER price elasticity of demand for onion is as low as 0.1 implying that 10 per cent increase in price can result only 1 per cent decline in demand for onion. This also implies that 10 per cent shortfall in onion supply causes 100 per cent increase in its price. Sensitivity of onion prices to small variation in supply is evident from the fact that during last 10 years onion price shocks have hit three times. However, we tend to forget it after the crisis is over.
The present onion crisis is a consequence of our neglect of response to put in place effective mechanism to prevent the crisis or reduce its severity. Every time we face abnormal rise in onion price, we attribute it to unfavourable weather and exploitation of situation by traders and so called cartelization, hoarding etc. and forget about it when price roll back to normal. We have been treating such shocks as inevitable rather than seeking a solution to avoid their recurrence.
A peek into the present crisis clearly reveals that adequate and clear signals were available as early as month of May-June about the coming price shock and that these have been exploited by onion traders under a clear strategy. Advance estimate about onion production in March 1213 indicated that production in 2012-13at country level will be lower by 4 per cent as compared to the previous year, with large variations across states. Private trade could understand its implications and started procuring onion in a big way by offering higher price to producer sellers. Market arrivals of onion in three post harvest monthsof rabi crop (April to June 2013) in 32 markets of the country was in fact 24 per cent higher than the previous year. As the supply from farmers dried up, the market arrivals beyond June were to be determined by the stock released by onion traders. Market arrivals in July and August were lower by 17 and 22 per cent compared to the previous year. This reduced supply, raised year on year market prices in the 32 markets in the months of July and August by 186% and 293% respectively compared to year 2012. It happened according to the expectation of the traders and according to what is implied by price elasticity of demand. Then it completely came in the hands of traders to dictate prices by calibrated release of stock with them. Here it is pertinent to point out that the decrease in production of onion is responsible for increase in price of onion this year only to small extent; predominant part is due to withdrawal of onion from the market by the traders.
The vital issues of concern is how to avoid or deal with onion price shocks which are hitting country almost every third year.This requires three steps. One, constant monitoring of prices and market arrivals by some agency of Central government and provide advance information to government about implications of supply fluctuation on prices, like early warning system of FAO. Two, take appropriate and early action based on market intelligence, like import, restriction on export and check on hoardings. Third, active intervention by public sector institution in domestic market and trade to counter price shocks and market manipulations by private traders.
We need to remember that private trade is benefited by price variations and volatility and their interest is against price stabilization. We also can’t expect private trade to arrange import to augment domestic supply as this will involve larger reduction in gains from domestic sales than gains from import. The anecdotal evidence reveal as if Indian onion traders have tacit understanding and some sort of cartelization and they are involved in price discrimination under which they are charging lower price in overseas market and higher price in domestic market like a monopolist. Therefore, public sector agency like NAFED has a crucial role in price stabilization through domestic operations as well as through trade. Such institutions can’t be created at the time of crisis – they have to there before the crisis. If India doses not take the three measures listed above, it is going to face recurrent price crisis in onion and may be in some other commodities also.
(Views of the authors are personal)