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| Rohit Ranjan Economist & Analyst |
The onion is considered as uncompromisable staple ingredient in Indian kitchens. It accounts for less than 1% by value of India's agricultural production. India is the second largest producer of onions after China. It produces about 220 lakh tonne of onions per annum while its annual consumption is about 160 lakh tonne. And to maintain the optimal price level it has to export ~10% of production unless weather events adversely impact the crop.
Onion commands far reaching impact on daily lives of large number of people in India to the extent that at times it also affects the political scenario in the country. Its fluctuating price determines the direction of inflation. It is regarded as the decisive factor in the 1998 state elections in Delhi and Rajasthan, and was responsible for bringing down the central government in 1980. Even in late 2019, it made lots of political furore through its ever increasing prices.
A heavy unseasonal rainfall in October led to fall in Kharif harvesting throughout onion growing states of Maharashtra, Karnataka and Telangana. As a ripple effect, onion prices increased everywhere in the country in Q4 2019. At the start of October 2019, the price was Rs80/Kg whichfurther breached Rs100/KG mark in December. Fearing a backlash, with effect from December-2019 onwards, the BJP led Government banned onion export and took steps to import 1.2 lakh tonne of onion to bring down the domestic price.
However, after a problem of skyrocketing prices in late 2019, another onion crisis is looming in onion market – a possible slump in prices amid a record production during 2020 Rabiharvesting season which is going to be further aggravated by the imposed lockdown to contain Coronavirus pandemic.
Record Rabi Harvesting in 2020
There are three sowing seasons for the onion crop in India – Kharif (planted between July-August and harvested in October-December); late Kharif (planted between October-November and harvested in January-March); and Rabi (planted between December-January and harvested in March-May). The share of these three seasons in total onion production is Rabi – 70 per cent, Kharif – 20 per cent, and late Kharif – 10 per cent. So, the Rabi onion crop is the mainstay of India. The Rabi crop is available in the markets from March-end to May, and then the stored Rabi onions mostly meet the consumer demand till early-October when the next Kharif crop hit the market.
The Rabi 2020 harvesting is projected for a historical surge in production. As per the latest estimates, in "Monthly Onion Report - March 2020 (Horticulture statistics Division, GOI), the rabi onion harvesting is estimated to increase by 38.5 lakh tonnes to 197 lakh tonnes in 2020, an upswing of ~25% Y-o-Y growth (~38% above the five year average).
A record rise in production is majorly due to a swelled sowing area ─ ~26% Y-o-Y growth ─ in the sowing area (990K hectare in 2020 Vs 780K hectare in 2019) along with a favourable weather condition. An expectation of high return amid a historical increase in onion prices during late 2019 is likely the top motivation factor behind the increased Rabi sowing area.
Impact of Lockdown on Onion Stocks
The rapid rise of Covid-19 pandemic and the Centre's decision to contain the disease outbreak in India through a strict lockdown (during March-end to May), had severely impactedthe movement of onions from farmland to nearby mandis and storage house during the peak harvesting season. The lockdown has completely disrupted the supply chain as most of the mandis were closed or running on a limited capacity along with a sharp fall in freight availability due to restricted and regulated movement. Also, there was a huge shortage of fleet for movement of goods during the lockdown, owing to dearth of drivers and consequent spike in truck rentals that has further paralysed the supply chain.
As a result of this disruption in supply chain, the wholesale prices are hit hardly. Further, the arrivals fell sharply, (close to -45% on yearly basis during March-May).
Expected Supply Glut: A combined impact of massive harvesting and supply chain disruption in lockdown
In the March when market was bracing itself for an outlook of bumper harvesting of rabi, an unprecedented lockdown happened. As a result, a pile of unsold onions remained with the farmers. Now as the government has already announced the relaxation in lockdown, the mandis are opening and the freight movement is normalising.
And in this scenario, a certain price crisis is looming over the onion market as the relaxation in the lockdown is likely to flood the market with recent crops which are kept piled with the farmers in lockdown ─ and the resulted glut will definitely have a potential to sink the onion price.
Government (both centre and states) need to actimmediately
Governments ─ both in centre and state ─ must act in time to check this upcoming excess supplies, otherwise, it will throw the onion prices for a historical slump. And if this happen, then, it will force the farmers to either go for distress sales or spill onions on the streets. Govt. has to take some immediate steps and some long term steps to fight the upcoming crisis.
• Government must increase the public procurement quotas for onion this year and create a mechanism for a quick distribution of excess procurement into the retail market. This will put a check on wholesale prices. Central govt. is already started working in this direction. NAFED, the govt. body for public procurement has targeted this time is to buy 1 lakh tonnes for the year 2020, an increase of ~43 thousand tonnes above last year purchases (an rise of 75% Y-o-Y in 2020 Vs. 2019). As per the recent updates NAFED has already procured 25,000 tonnes of onion till mid-June, from farmer producer organisations (FPOs), cooperatives and direct purchase centres at the prevailing rates for creating a buffer stock on behalf of the government. However, they have to increase this quota and also create a mechanism for a faster distribution of the procured onion through market channel.
• Next, Government of India can go for higher exports in 2020 to balance the market supply in domestic market. To promote exports surplus onion harvests, the government can incentivise exporters with the Merchandise Export Incentive Scheme (MEIS). The rewards under MEIS are mostly in the form of transferable duty credit scrips. The MEIS scheme for onions was first introduced in February 2018 when the domestic onion price had fallen to Re. 1 per kg amid an upsurge in supply. But it was later suspended in June 2019 due to steady rise in domestic retail prices. The state government of Maharshatra has already written to the central government seeking the re-introduction of the subsidy-based export scheme for onions.
• Further, government need to keep an eye over prices in mandis for any predatory pricing.
• Additionally, govt. has to provide encouragement and support to increase the production of processed onions like onion powder, dried onion, onion flakes etc, through various MSME schemes. The processed onions have good perishable life and have potential for higher returns.
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