Why do Onion Prices Cause Such a Stink in India?

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By: Dezan Shira & Associates
Editor: Melissa Cyrill

The humble onion, a staple in Indian diets, is predisposed to volatile pricing, routinely affecting households and businesses throughout the country. This is why the furor over pricey onions quickly reaches the corridors of power where electoral folklore paints a punishing story for incumbent governments. A multitude of factors, ranging from the state of monsoon rains, lacking storage facilities and a nexus between traders and suppliers, contribute to these conditions. Most is a result of India’s outdated food supply chain that is riddled with redundancies, and provides ample scope for corruption and wastage. Delving deeper reveals the curious nature of India’s status as an onion exporting economy that simultaneously exhibits shortages.

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Rising Production, Spiraling Prices

Onion production in India has increased over the past decade but inefficiency and local variables continue to keep costs unpredictable. Since 2008-2009, the production of onions has risen from 13.6 million tons to more than 18 million tons, allowing India to become a key exporter to world markets. Moreover, the crop is planted thrice in a year, which provides sufficient produce to meet the market’s demand even during the lean season that coincides with the start of major festivals (Dussehra, Diwali, Eid and Christmas) and the auspicious season for ceremonies like marriages during the months of September to January. Nonetheless, despite the high production and multiple cropping patterns, the bulk of onions are grown in a few states, 45% of which is in Maharashtra and Karnataka alone. This means that they become liable to any hits in harvest or post-harvest storage. Thus, the character of monsoon rains and the proper storage of the different onion breeds greatly impact their pricing, right from when the vegetable is auctioned at the wholesale market to its final retail value. Indicative of this was the two year high reached in August 2015 when onions were sold at about US $1.20/176.37 lbs (Rs 80/kg) in major cities like Delhi and Mumbai.

Opaque system, inefficient food supply chain

The inefficient supply chain significantly increases onion costs due to a multiplicity of middlemen, speculation, corruption and wastage. The rate of wastage also gets amplified in the absence of an adequate food-processing industry as low-quality onions are simply thrown out instead of being turned into value-added commodities such as paste or sauces. Additionally, the deficient storage infrastructure leads to significant post-harvest loss while fears of loss of taste of the Indian onion accompany any suggestion towards adopting China’s cold storage model. Moreover, small farms betray no economies of scale and local farmers themselves can be illiterate to the usage of modern technology to deal with seasonal disturbances to production. Meanwhile, retail prices are about double of what farmers receive, and traders who buy onions from farmers hoard them. The entire system of buying and selling lacks transparency, and any variation in the demand and supply gets amplified, causing violent swings in price. For instance, at the point of auction in Lasalgaon – Asia’s biggest onion market in Maharashtra state – farmers ‘showcase’ their onions to the split-second arbitrary judgment of big traders, and prices vary significantly day by day according to size and quality in the absence of standardization. 

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Flawed Policies, Continued Implementation

The central government’s response is standard – damage limitation through manipulating price controls, providing subsidies and in worst cases, securing imports – none of which actually resolves the underlying cause of the recurring problem. This season’s high prices have been attributed to a fall in production in 2014-2015 for a variety of reasons from climate change to the level of monsoon rains to an erratic export regime. After prices hit the roof in August, India had to finally import onions from Egypt and Afghanistan in order to meet the domestic demand and stabilize the price. Further, to dissuade exports, the central government moved the MEP (minimum export price) to $700 per ton (up from $425 in June). Such regulatory responses have only enabled the price volatility of the onion. Ultimately, the need for investments in logistics and standardization of key infrastructure such as warehouses and factories continue to remain ignored, to future detriment.

 


About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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