News article: The Onion Price Rise: What actually made us cry?

The aam aadmi has been hit by the high rate of food price inflation. Though there was a general
increase in the prices of fruits and vegetables in the past year, the fluctuations in the price of onion
were quite notable and were the subject of much debate. This article discusses the probable causes of
the sharp rise in the prices of this essential item in the Indian diet.

Background of the issue

India is the second largest producer of onions in the world. The annual average production is 12 lakh
tonnes per annum. More than half of the total yield comes from Maharashtra. Onion cultivation is
primarily centered in the Nashik, Pune, Ahmednagar, Satara, Sholapur and Dhulia areas of
Maharashtra. These regions are endowed with the well drained, non-crusting soil required for onion
cultivation.

The harvest cycle of onion cultivation in Maharashtra is as below.

Sr. No. Seasons Time of sowing Time of transplanting Time of harvesting

1. Kharif May-June July-August September-December
2. Early Rabi or late Kharif August-September September-October January-March
3. Rabi October-November December-January April-May

Source: Maharashtra State Agriculture Marketing Board, accessible at:

http://www.msamb.com/english/export/canalising.htm

The rise in the price of onion began at the end of October. It was the fluctuations in Kharif yield that
led to the price rise. The chart below shows the arrival of onion and the price trends from September
2010 to January 2011:

As can be
seen, the
market arrival
of onion at the
end of
October was
at an all time
low. The price
levels shot up
by mid-
December,
after which
there was a
sudden
decline by the
first week of
January.
However, the sudden fall only gave way to greater fluctuations across the month. Thanks to the ban on
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exporting and hoarding, the arrivals bounced back after hitting a low in the first week of January. The
monthly figures however reveal high retail margins1 even when arrivals were on the rise.

Spokespersons for the government followed the old practice of blaming supply side factors. But this
explanation is hard to digest when the facts are examined.

Probable reasons for the price swing

The Kharif yield was definitely well below the normal level. The Indian Council of Agricultural
Research (ICAR) states that the reduction in the yield was caused by the spread of fungal diseases like
Purple Anthracnose and Purple Blotch among the Kharif onion saplings. The erratic monsoons that
caused water logging in the flat crop beds resulted in the spread of the above fungal infections among
the saplings. The humid climate that prevailed from August worsened the situation. Though pesticides
are generally effective against these fungal diseases, the heavy downpour made the spraying
ineffective. The end result was an unprecedented fall in the Kharif yield.

Though the above mentioned supply side developments had an important role in triggering the price
rise, it is impossible to ignore the part played by other elements in aggravating the problem. These
include:

(a) Poor buffer stock maintenance

(b) Failure to discourage exports
(c) Lack of policy preparedness
(a) Poor buffer stock maintenance
The vagary of the monsoon is not new in India. The importance of maintaining buffer stocks to
meet these kinds of exigencies have been stressed over and over again in the country. Though
the states reported adequate buffers, it was insufficient to meet even the normal demand levels.
But, the buffer stock was primarily built on the Kharif yield from Andhra and Rajasthan.
Further, the Kharif yield cannot be stored for more than a month. The poor buffer management
systems is partly reflected in the fact that buffer stocks were not built using the Rabi yield,
which lasts from four to six months.
(b) Government's failure to discourage exports

The immediate response of the government was to discourage the exports. To do the same the
government increased the MEP (Minimum Export Price) of onion. However, as it turned out, it
was an ineffective measure to reduce exports. The export demand did not shrink, as expected,
by the augmented MEP. The strategy eventually had the reverse effect. The wholesalers
became interested in meeting the export demand with their already low yields. This was the
case at least for the existing NOCs (No objection certificates). Two fundamental faults can be
identified in the above stated government response.
i. Weak policy response
It was a weak policy response to a situation marked by rapidly falling arrivals and
unprecedented rise in prices.
ii. Failure to learn from the past
It was not the first time that the strategy was rendered ineffective. A similar situation was
reported in August 2008, when onion exports almost doubled despite an increase in the MEP
for shipments from $25- $180 a tonne.
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 iii. Lack of policy preparedness
The failure of the authorities to foresee the impending trouble was definitely an identifiable
cause. If the outbreak of the fatal crop disease was reported in the Kharif season, (July to
November), government should have taken steps to build more buffer stocks and
discourage exports at a much earlier stage. The potential to build sufficient buffer stocks on
the bumper Rabi yield was also not exploited.

To summarize, it is unfair to hold only supply side factors responsible for the upswings in
onion prices. The government cannot deny its failure to adopt prompt and adequate measures
required for moderating the price fluctuations. If that is taken into account, the food price
inflation can be seen to have been caused by the government's action (inaction) and not by the
emerging domestic demand or by the unfortunate supply side conditions alone as vehemently
argued by some.

[1] Refer to Ghosh, Jayati (2011): ‘Food prices and distribution margins in India', accessible at:
http://www.macroscan.org/fet/feb11/fet030211Food_Prices.htm

[2] Anthracnose results in pale yellow spots of leaves which expand length wise covering the entire leaf blade. Leaves affected by anthracnose
shrivel at the earlier stages and later droops. Blotch is marked by water soaked lesions, and purple centers on leaves, leaf bases and flower
stalks. The disease also leads to the shriveling and consequent drooping of leaves.

[3] The issuance of NOCs was completely suspended only by the last week of December

The case let for class discussion The Onion Prices Rise-What actually made
Indian cry?

Public outcry over Onion Prices

During the period of December 2010 to January 2011, it seemed as if all of India was shedding
tears over onion prices, which had suddenly registered a sharp rise. The average price, which was
running around Rs 30 in the first week of December 2010, had shot to above Rs 50 by the fourth
week of December. Some centres even recorded a much higher price, with a peak of approx. Rs 85
in Gurgaon (Exhibit 1), a city in Haryana state in India. Consumers across all income strata reduced
their onion consumption. For some, in spite of a reduction in their consumption, the expenditure on
onions almost doubled. Even restaurant owners substituted onions with shredded cabbage, carrots
and pumpkin in their dishes. There was a hue and cry over the onion prices across the country, with
consumer forums blaming the government for not taking action to curb onion prices. The
opposition parties in the parliament also blamed the government for pursuing the wrong economic
policies. The government suspected hoarding by the traders to be the main culprit behind the
soaring prices and warned them to release onions from their stocks. It imposed a ceiling on stock
holding and issued a search order. The traders argued, on the contrary, that a natural supply-demand
gap was the main reason for the soaring prices. There was total chaos, with all the stakeholders
blaming each other for the situation and with no clear explanation of what was wrong. Was the
shortage due to a natural supply shock? Was it a result of an artificially created shortage? Was it an
outcome of wrong government policies? Or was it simply the result of changes in demand
conditions? The government and business analysts were wondering not only about the causes of the
sharp price rise, but also about the appropriate interventions and policy changes required to
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stabilize the prices.

The Prices of Onions

Supply side of the market

India is the second largest producer of onions in the world (Table 1). Maharashtra state is the
largest producer of onions in the country, accounting for 41% of the area harvested and 38% of
production (Table 2). Within Maharashtra, Nashik district contributes 35 to 40% of the state’s
production. Lasalgaon in Nashik is the biggest onion market in the country; hence, this market
largely determines the prices in the country. The other major onion-producing states are Karnataka,
Gujarat, Bihar, Madhya Pradesh and Rajasthan.

Table 1: Onion Production, Area and Yield: Top 10 Countries in the World in 2009
Country Production (tonnes) Area Harvested Yield (hg/ha)
(ha)
China 21,046,969 947,611 222,106
India 13,900,000 846,909 164,126
USA 3,400,560 60,120 565,629
Turkey 1,849,580 65,000 284,551
Egypt 1,800,000 54,000 333,333
Pakistan 1,704,100 129,600 131,489
Russian Federation 1,601,550 85,700 186,879
Iran 1,512,150 47,450 318,683
Brazil 1,511,850 66,013 229,023
Netherlands 1,269,000 26,000 488,077
Spain 1,263,400 23,600 535,339
Source: FAO. FAOSTAT-Agriculture, http://faostat.fao.org/site/567/default.aspx#ancor

Table 2: State-Wise Area and Production Data for Onions in 2011-12

State Area Production Yield Share in Total Production

(‘000 ha) (‘000 MT) (Ton/ha) %

Andhra Pradesh 54.9 732.3 13.3 4.84
Bihar 54.4 1,138.50 20.9 7.52
Gujarat 57.3 1,394.60 24.3 9.21
Haryana 23.2 476.5 20.5 3.15
Jharkhand 17.2 364.1 21.2 2.41
Karnataka 130 1,756.70 13.6 11.61
Madhya Pradesh 64.1 985.1 15.4 6.51
Maharashtra 387 5,823.50 15.1 38.48
Others 17 340 20 2.25
Rajasthan 48.6 900 18.5 5.95
Tamil Nadu 37 556.5 15 3.68
Uttar Pradesh 23.6 370.8 15.7 2.45
West Bengal 21.2 297 14 1.96
Total 935 15,135.60 100.00

Source: National Horticulture Research and Development Foundation

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 http://www.nhrdf.com/ContentPage.asp?DataCode=202

There are three main seasons for onion production: kharif (monsoon), late kharif and rabi (winter)
(Table 3). The rabi crop is the major crop, contributing 70% of total onion production. Some of the
rabi varieties have excellent storage quality of about four to six months.

Table 3: Onion Seasons in India

States/Regions Seasons Time of Time of Time of
Sowing Transplanting Harvesting
Maharashtra and 1.Kharif May-June July-Aug. Sept.-Dec.
some parts of Gujarat 2.Early Rabi Aug.-Sept. Sept.-Oct. Jan.-March
3.Rabi Oct.-Nov. Dec.-Jan April-May
Tami Nadu/Karnataka 1.Early Kharif March-April April-May July-Aug.
and AP 2.Kharif May-June July-Aug. Oct.-Nov.
3.Rabi Sept.-Oct. Nov.-Dec. March-April
Rajasthan/Haryana/Pu 1.Kharif May-June July-Aug. Nov.-Dec.
njab/UP and Bihar 2.Rabi Oct.-Nov. Dec.-Jan. May-June
West Bengal & Orissa 1.Kharif June-July Aug.-Sept. Nov.-Dec.
2.Late Kharif Aug.-Sept. Oct.-Dec. Feb.-March
Hills 1.Rabi Sept.-Oct. Oct.-Nov. June-July
2. Summer Nov.-Dec. Feb.-Mar Aug.-Oct.
Source: National Horticulture Research and Development Foundation
http://www.nhrdf.com/ContentPage.asp?DataCode=202

Onions are a commercial crop. The estimated cost of onion cultivation varies from Rs 79,590 per
ha to Rs 87,900 per ha (Tab.4) (for the international equivalence of Indian units of measurement,
see Exhi. 2), which is comparatively smaller than the cost of cultivating other crops. Apart from
the suitability of soil for onion production, the lower cost of cultivation also attracts many small
and medium farmers to this crop.
Table 4: Cost of Production of Onions During 2011-12 in Maharashtra (Cost Rs/ha)
Operations Kharif Late Kharif Rabi
1. Land 10000 10000 10000
2. Seed Cost 4800 4800 4800
3. Nursery Raising 3500 3500 3500
4. Land Preparation 7000 7000 7000
5. Transplanting 8000 8000 8000
6. Irrigation 4000 4000 4000
7. Manures & Fertilizers 16000 17500 17500
8. Weeding and Hoeing 6000 6000 6000
9. Plant Protection 4000 4000 4000
10. Harvesting, Curing, Sorting etc 7000 8000 8500
11. Transportation 3000 3500 4000
12.SupervisoryCharges 1500 1500 1500
13. Overhead Charges 1000 1000 1000
14. Total (Rs) 75800 80800 83800
15. Bank int. @ 10% p.a. for 6mths 3790 4040 4190
16. Total cost (Rs) 79590 84840 87990
17. Average Yield (Quintal) 160 245 250
18. Cost per Quintal (Rs) 497 346 352

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Source: National Horticulture Research and Development Foundation (2012)
http://www.sfacindia.com/Docs/Onion%20&%20Potato%20Baseline%20Report.pdf

In spite of India being a major producer of onions, its productivity is one of the lowest amongst the
major growing countries. Apart from lower yield, the crop is also subject to excessive post-
harvest storage losses in the event of adverse weather conditions, lack of dormancy (inactive state)
in bulbs, and pest and disease infestation, which affect the economic viability of the crop.
Storage of onions and supply

Unlike wheat, rice and other food grains, onions are a highly perishable commodity; hence, they
cannot be stored for long periods. Also, the storability of onions depends on their variety and the
harvesting period. Kharif crops cannot be stored for more than a month, whereas rabi crops can be
stored for four to six months. However, conventional methods of onion storage can result in large
losses, even in rabi crops, due to weight loss, sprouting and rotting of bulbs. To overcome these
losses, the country requires scientifically constructed cold storage facilities, which, as per the
Maharashtra State Agricultural Marketing Board (online), can cost around Rs 6,000/- per mt
storage capacity (excluding the cost of land). The country requires an additional storage capacity
of around 12 lakh tonnes and modernization of 8 lakh tonnes capacity of existing units (National
Bank for Agriculture and Rural Development, 2000).

Because of the lack of proper storage facilities, most farmers bring onions directly to the market
and unload their entire stock within a month of harvest. As a consequence of the glut in the
market, the prices are very low in the months of April and May (Figure 1), which adversely affects
the earnings of farmers. Wholesale traders store onions, but in a traditional and unscientific
manner; hence, the supply becomes limited in the subsequent months and prices rise rapidly and
steeply, leading to dissatisfaction among consumers as well as farmers. Consumers feel the pinch
of the high prices because they are accustomed to using the bulbs on a daily basis, whereas the
farmers’ agony is due to poor yield, lack of storage facilities and low prices. Sometimes, they are
not able to recover even the cost of cultivation. In the absence of proper storage facilities, prices
fluctuate widely, which creates uncertainty in the environment and hampers cultivation decisions
in the ensuing onion-growing season.

Figure 1: Month-Wise Market Arrivals and Prices (in Rs) of Onions for All Months
in Lasalgaon (Nashik) in Maharashtra

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 Source: National Horticulture Research and Development Foundation
(http://www.nhrdf.com/ContentPage.asp?ResultCode=301)

Demand side of the market

Except for a few communities, onions are used in the day-to-day cooking of both the poor and
the rich across the country. Apart from households, restaurants are also major users of this bulb.
It is used not only raw, but also in processed form – fried, boiled, baked, dried and powdered as
well as in curries, soups and pickles.

Onions also have numerous health benefits and healing properties and are widely used in the
manufacture of medicines for dropsy, kidney, heart, liver, diabetes, tuberculosis, colic, scurvy,
rheumatic pain and other inflammatory diseases.

However, most Indians use onions not because of their inherent health benefits, but because
they are a condiment that adds taste to the food to which they are accustomed. Also, onions are
usually plentiful and inexpensive, even poor people can normally afford them. Though some
consumers substitute onions with grated cabbage or pumpkin puree during periods of scarcity,
there are not many close substitutes for onions. A small change in the price, therefore, does not
have a large effect on the quantity demand. Considered to be almost an essential item, it takes a
very big change in the price to affect the consumption of onions.

Regulations & Governmental Policies

In India, in general, the government regulates food grains and vegetable markets by fixing
minimum support prices, minimum export prices, tariffs on imports and quantitative
restrictions. As far as the onion market is concerned, the government pursues the following
policies:
 First, the government provides the minimum support price to farmers to augment the
production and supply of various agricultural products, and to support their income.
However, as onions cannot be stored for long periods and their storage requires a special
type of structure and huge area, it is not possible for the government to purchase, store
and market onions. Therefore, the government does not provide support prices for
onions. The lack of storage facilities results in large fluctuations in the market price of
onions.
 Second, the government regulates the export of onions by fixing the minimum export
price. India is a major producer of onions; hence, supply from India can influence world
onion prices. In a situation of normal supply, onions are available at a cheap price. If
exported at this price in the world market, they are not very remunerative for Indian
farmers. Therefore, the idea behind fixing the minimum export price is to provide
lucrative prices to the farmers, to encourage the export of onions and to maximize
foreign exchange earnings for the country. Keeping these objectives in mind, in a
normal supply situation, the minimum export price is fixed above the market clearing
price in the domestic market, but below that prevailing in the world market. The
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 minimum export price, however, affects the supply in the domestic market. An increase
in export prices (above the world market price) makes the exports more expensive in the
international market, thus reducing demand for exported onions in the global market.
However, this helps increase the supply in the domestic market. The reverse holds true
when the minimum export price is lowered. To ensure a smooth domestic supply and to
moderate fluctuations in domestic onion prices, the minimum export price is fine-tuned
every month, taking into account quality, crop prospects, market trends, expenses
involved, freight charges, etc.
 Third, India is a major producer of onions in the world. To prevent a glut in the market
and to ensure fair prices to onion farmers, the government tries to restrict the import of
onions by imposing an import duty.

 Fourth, in extreme situations, the government can impose quantitative restrictions and
even completely ban the export and import of onions.
 Fifth, in India, the inter-state sale of agricultural products, including onions, is restricted
by various state-level regulations and taxes to ensure food security in the exporting
states and to avoid excessive competition in the importing states. Such restrictions, in
spite of the removal of a ban on the inter-state movement of agricultural commodities,
fragment the markets, result in black marketing and hoarding, boost the commission of
middlemen and make prices highly volatile.

What led to Soaring Onion Prices?

In general, the overall price level in India hovers around Rs 15 per kg. However, the country
also experiences seasonal fluctuations in prices. Onion prices generally run high in the lean
months of Dec-Jan and dip sharply in Apr and May with the arrival of the rabi crop. But the
period of Dec 2010 to Jan 2011 saw an unprecedented rise in the wholesale and retail prices,
which were much higher than those registered in the same period in 2009-10 (Fig. 1 and 2).

Was it a supply shock?

Various natural factors affected the kharif crop adversely in Maharashtra, which is the major
onion-growing region in the country. Fungal diseases like purple anthracnose and purple blotch
affected the kharif onion sapling. The situation further deteriorated with an erratic and extended
monsoon, which caused waterlogging in the flat crop beds and spread the fungal infections
among the saplings rapidly. The heavy downpours and prolonged humid climate also made the
spraying of pesticides ineffective. The untimely heavy showers in southern India also affected
the onion crop in Karnataka and Tamil Nadu states. As per one estimate, overall, 40% of the
crop was damaged.

The impact of natural factors on supply could have been mitigated, however, had there been
sufficient onion reserves available in the country. But since it was lacking proper storage
facilities, the country did not have enough of the durable rabi crop in storage. Whatever stocks
the states reported were primarily from the kharif crop, which was not sufficient to meet even
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 normal demand levels.

Was it a demand shock?

Some analysts argue that India is one of the world’s fastest growing countries, with an average
GDP growth rate of 8 to 9%. Improvements in income levels have been causing changes in
dietary habits in favour of protein-rich foods, fruits, vegetables, pulses, milk, etc. Dietary
changes, along with population growth, have led to increased consumption of various
agricultural products, including onions, and have caused continuous price increases.

Apart from the overall increasing trend in the demand for onions, there was also a seasonal
increase in demand, which caused a sharp spike in onion prices. December-January is wedding
season in India. Major festivals, such as Christmas, New Year’s Eve, Makar Sankranti, etc., fall
in these months. Families and friends visit each other during these festivities in India and
celebrate the events with special meals, increasing the demand for onions and other vegetables
during this period.

Was it speculation?

Traders did take advantage of the apparent mismatch of demand and supply. The demand-
supply gap, which would have been minor, was widened by speculative activities and hoarding
by intermediaries. The widening of the gap accentuated the deviation between wholesale and
retail prices (Fig. 2) and worsened the situation manifold in the market place.

Figure 2: Wholesale and Retail Onion Prices (in Rs) in December 2009 and 2010

Source: Ministry of Consumer Affairs, Food and Public Distribution,

http://fcainfoweb.nic.in/Prices_Application/daily_prices/san_interface_daily.asp.

Expectations also played an important role on the demand front. In anticipation of a further rise
in the price of onions, consumers also tried to safeguard their interest by demanding more
onions than their normal requirement and storing them. Those families that usually used only 2
kg of onions in a month bought 5 kg in anticipation of additional increases in onion prices,
further accentuating the shortage of onions in the market.

Was it government policy?

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 The opposition parties as well as analysts blamed the supply shortage on the government’s
economic policies. They argued that, in its zeal to promote onion exports (India is the largest
exporter (Table 5), the government had ignored the rising domestic demand. India used to export
just 106 thousand tonnes of onions 50 years ago. With the emergence of the WTO in 1995, and
after the removal of quantitative restrictions, the export of onions increased rapidly, reaching 1,670
thousand ton in 2008 (Fig. 3), which accounted for around 12% of total production.

Table 5: Onion Exports: Quantity and Value: Top 10 Exporters in the World in 2008
Countries Quantity Countries Value ($)
India 1670720 India 422832
Netherlands 1100050 Netherlands 375646
China 545310 Mexico 301007
USA 320773 USA 182507
Mexico 279989 China 133026
Spain 254773 Spain 96878
Turkey 210936 Argentina 77502
Argentina 202597 Poland 66706
Poland 141672 Egypt 41559
Egypt 103321 Italy 40749
Source: FAO, FAOSTAT-TradeSTAT, as on 24/9/2011
(http://faostat.fao.org/site/535/default.aspx#ancor)
Figure 3: Trend in Export of Onions

Source: FAO (2011), FAOSTAT-Agriculture http://faostat.fao.org/site/342/default.aspx.

Apart from the removal of quantitative restrictions, the policy on minimum export prices had
promoted export value and volume. The minimum support prices had usually been kept low in
comparison to international prices to make Indian exports competitive and enhance the demand
for exported onions. However, since these prices were higher than those in the domestic market,
the effect of this policy had been to reduce the supply of onions in the domestic market.

The government was also criticized for delayed policy responses. The outbreak of the fatal crop
diseases was reported in the kharif season and it was expected that the yield would be low and
prices would soar. Anticipating this, the minimum export prices should have been sharply
increased as soon as it became apparent that there would be a supply shortage. But the
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 government response on this front was very late in coming. Critics of the government’s policy
argued that the government could have averted the sharp supply shortage by restricting exports
and resorting to imports at a much earlier stage and by building up buffer stocks on the bumper
rabi.

Government Management of the Crisis and Its Impact

To the extent that they are part of even the poorest person’s meal, onions have played an
important role in Indian politics. Hence, a sharp rise in onion prices is considered to be a
politically sensitive issue. The Indian national election of 1980 and state elections in Delhi and
Rajasthan in 1998 came to be known as “onion elections” because the runaway onion prices in
those years brought down the government in power at the time.

The soaring onion prices, which were reducing home cooks and restaurateurs alike to tears and
threatening to fuel public ire over runaway food prices, compelled the government to respond
forcefully by implementing various measures on December 21, 2010. The immediate response
of the government was to discourage exports by asking the National Agricultural Cooperative
Marketing Federation (NAFED), responsible for marketing (including exports and imports) of
agricultural products for the benefit of farmers in the country, and other agencies to
“voluntarily” suspend onion exports. The government also more than doubled the minimum
export prices to $1,200 a ton from $500 a ton, making onions more expensive in the
international market and thus discouraging exports. The government also attempted to augment
supply by eliminating the import duty on onions, which was 5% at that time, and by importing
shipments of onions from neighboring Pakistan.

However, the prices ruled steady. Finally, to bring prices down to a desirable level, the
government intervened directly in the market by making the NAFED supply onions at the price
of Rs 35, far below the market prices at the time. However, the huge demand persisted at this
price and the government ended up rationing onions by limiting the supply to 2 kg per person at
the time of distribution by the NAFED.

As the supply of onions at this price was below the cost of procurement, the government agreed
to compensate the NAFED for 30% of the losses it was estimated to have incurred by selling
onions at a cheaper rate implying an increasing burden on taxpayers. The government released
Rs 15 crore to NAFED to subsidize onions and to help tide over the capital city of Delhi during
the crisis.

What Is Needed?

Business analysts questioned whether the government should leave the matter of export and
domestic price fluctuations to the natural forces of demand and supply, and intervene in the
market only in the event of large volatility, by subsidizing onions to consumers. Would the
traders and farmers benefit from such a policy? Or, should the government scale up storage
facilities by investing heavily in infrastructure to provide long-run price stability? Such an
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 approach would, however, drive up the government’s already high deficit, the burden of which
would fall on everyone, including consumers, traders and farmers, in the form of higher
inflation.

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