Feb 21st 2011, Ann Mary John

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

Table 1 >> Click to Enlarge

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:

Chart 1 >> Click to Enlarge

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 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 saplings². 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

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)³. 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.

(3) 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.

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