InvestorQ : Why are the prices of onions back to high levels and why it is a regular feature in the Indian markets?
Archita Jajjoo made post

Why are the prices of onions back to high levels and why it is a regular feature in the Indian markets?

Rashi Mehra answered.
2 years ago

Onion prices are politically sensitive. It brought the Sushma Swaraj government in Delhi state in 1999 and the BJP has been still struggling to come back. Onions are considered to be the food of the masses and that is why it is an important economic and political issue.

Erratic monsoons creates erratic onion prices

Onions are back in focus due to the recent upsurge in prices. There are some unique facts about onion cultivation in India. Indian onion supply comes from across various states. This ensures a perennial supply into the market. The only risk is delay in the onset of monsoon or a deluge due to torrential rains late in the season. In 2019, India had a mix of delayed onset of monsoons and also a late deluge. This resulted in a sharp spike in onion prices. But the actual economics of onions is a lot more complicated than that.

Understanding the economics of Indian onions

India is a surplus onion producer and that may come as a surprise to you. Look at the numbers! Annual production of onions in India is 24 million tons while the annual demand is just about 16 million tons. That leaves a surplus of 8 million tons each year. Out of this, the annual exports are just about 3 million tons. That still leaves a surplus of 5 million tons. On top of this, there is also some 4 million tons of onions imported annually from Egypt and Pakistan. What we can conclude is that the annual wastage of onions is in the vicinity of 35-40% and that is putting all the pressure on the onion markets.

Government must intervene on supply issues

This is perhaps the missing link. The answer to onion economics lies in managing the supply more efficiently. For example, a ban on exports is not the right strategy because it prevents your farmers from getting a good price abroad. Instead, stipulating a minimum export price (MEP) could be a better solution. The second issue is about handling wastage. Currently, wastage is close to 35-40% and that is a big share of the output. Spoilage can be handled with better and bigger outlays for post-harvest infrastructure. In addition, the government can address the issue of onion prices by creating a buffer stock of 2 lakh tons of onions. That would be a small cost for more certainty in pricing such a sensitive commodity.

In a nutshell, Onion farmers exemplify the farmer stress in India. Government has committed to double farm incomes by 2022. Hopefully, it should address the onion farmers from a long term perspective.