Onion price volatility is a hot potato

The impact of unseasonal rain resulting in crop damage and late sowing has started peeling off high-priced layers of onion, bringing more tears to consumers. The retail price in Delhi, Guwahati, has doubled to Rs 80 per kg over the past couple of days. The paradox of onion prices rising despite the country producing double the quantity of domestic demand has cast a shadow over the festival season. Managing the domestic supplies in between two crop cycles of onions is crucial to checking price volatility. The skyrocketing cost of onions has also become a political hot potato. Opposition parties have raised the issue in a bid to make it an electoral issue in five states: Rajasthan, Chhattisgarh, Madhya Pradesh, Mizoram, and Telangana, which are going to assembly polls next month. The central government has rushed to amend the export policy and imposed a minimum export price of 800 US dollars per metric tonne (MT) until December 31 in a bid to maintain domestic availability. Official estimates show that production of onions increased in 2022–23 to 318 lakh MT from 316 lakh MT in 2021–22. Maharashtra accounts for the highest production share of 43%, followed by Madhya Pradesh (16%), while Karnataka and Gujarat produce 9% of the national production each. The Rabi crop of onion accounts for about 72% of the national production, and hence any disruption in the Rabi crop cycle has a cascading impact on overall production, which in turn influences wholesale and retail prices. Unseasonal rains and hailstorms damaged the standing onion crop in Maharashtra and Madhya Pradesh, which triggered the apprehension of a fall in production and supply disruption. The central bank imposed a 40% export duty on onions in August with the objective of increasing domestic availability. The government is also releasing buffer stocks for sale at a subsidised price of Rs 25 per kg to cool the onion price. The buffer has tripled from one lakh MT in 2020–21 to three lakh MT in 2023–24 after two central nodal agencies, NAFED and NCCF, procured 1.50 lakh metric tonnes each of rabi onion from Maharashtra and Madhya Pradesh. The government raising the buffer stock to 5 lakh MT was aimed at price stabilisation for consumers and ensuring remunerative prices for farmers, but the increase in annual domestic consumption outpaces the impact of the release of buffer in major markets. Besides, the quantity of buffer release for different states varies and is often quite low for the north-eastern states, allowing hoarders and black marketers to rule the roost, taking advantage of the longer shelf life of the Rabi crop compared to the Kharif crop. The dependence of the northeastern region on supplies from outside the region leaves consumers at the mercy of retail traders, who blame the wholesale traders for the price hike. The situation cannot be expected to change without the states in the region boosting onion production. The Price Stabilisation Fund (PSF) is another mechanism adopted by the central government to absorb price shocks, but high price volatility is indicative of shortcomings in the mechanism that need to be addressed. States can avail interest-free loans from PSF to procure and maintain buffers of onions, potatoes, tomatoes, and pulses to moderate prices and provide relief to consumers. Rising onion prices have triggered the apprehension of sticky food inflation returning after it eased in September and October. Food inflation surged to 11.51% in July and 10% in August on account of the rise in onion and other vegetable prices. Retail inflation eased to 5.02% in September, below the Reserve Bank of India’s upper tolerance band of 6%, which helped raise market sentiment for the festive season. The fresh rise in onion prices has become a dampener and may have a ripple effect on ensuing Dewali and New Year celebrations if the measures initiated by the central government fail to yield the desired result. With five states going to the polls, the ruling Bharatiya Janata Party (BJP) will be wary of the adverse impact of rising onion prices, but this may equally hit the opposition I.N.D.I.A. bloc parties in the states where they are in power. As for consumers, unchecked and sticky retail inflation is often seen as the failure of the state government to take effective measures to check price hikes. Ordinary citizens can hardly relate the price rise to complex market dynamics and policies, and that is why electoral campaigns around these issues can equally affect both the central and state governments. Controlling the prices, therefore, becomes equally important for the States. For states in the northeast, focusing on boosting local production and reducing dependence on major states to meet consumption demand is critical to insulate consumers from price shocks. The States also need to ensure that farmers get remunerative prices to prevent them from shifting to alternative crops. Only protection of the interests of farmers and consumers can check price volatility.