With the passage of Rajya Sabha amendments to the Essential Commodities Act (ECA), food prices will enter a new political paradigm. The government claims that deregulation – the new ECA removes restrictions on the movement and storage of food such as onions by private actors – will incentivize the creation of better infrastructure and lead to an increase in farm income.
Critics argue that this could legalize hoarding. Farmers, deprived of capital, often sell their crops when prices are low.
Onions present an interesting study. Although they are not a commodity, last week the Union government banned onion exports. HT reported that the government also planned to release its buffer stocks on the market to lower prices. Inflation has become a serious problem in recent months. Headline inflation has been above 6%, the upper band of the Reserve Bank of India’s comfort level, for the fifth consecutive month. Food inflation is above 9%.
The government’s move to ban onion exports and release buffer stocks, in this context, is a preemptive strike against inflation.
However, onion growers are likely to end up crying. The recent price rally came after a long phase of lower prices. This is not the first time this has happened. Unlike their grain-producing brethren, vegetable farmers face much greater volatility in prices and incomes. This is because there are no minimum support prices (MSP) driven by minimum prices and costs do not drop when prices plummet.
Also, while the government is proactive in limiting windfall gains for farmers during times of high prices in the name of fighting inflation, it does not shy away from applying inflationary policies for its own benefits. For example, it continues to impose high tariffs on gasoline and diesel, while attacking the income of onion farmers to control inflation.
The prices of vegetables are more volatile than those of cereals
The data from the national accounts statistics (NAS) give the value of the production of the main crops at current and constant prices. While the prices of two major grains, rice and wheat, have risen continuously, those of major vegetables tend to fluctuate widely. This volatility is not seen in the cost of production. An examination of cost measure A2 + FL, which includes the cost of own and hired labor, rent from leased land, and other inputs, for rice, wheat, potatoes, and onions shows this. Highly fluctuating prices, with ever-increasing costs, mean that vegetable producers are vulnerable to high volatility in income.
This also means that unless they are allowed to make windfall profits, they cannot make up for the windfall losses they suffer when prices fall.
An article by Ila Patnaik and Radhika Pandey, economists at the National Institute of Finance and Public Policy, says that the government has changed the export rules for onions at least 17 times between 2104 and 2019. Frequent export bans may suggest that most of the onions from India the output is exported. An analysis of the business data shows that this is not the case. Onion exports usually represent less than 10% of national production and, here too, farmers face a very volatile market.
High prices don’t always lead to higher income
Farmers value income above prices. Many instances of an increase in onion prices, this is true for most horticultural products, are driven by a supply shortage due to weather-related crop destruction. This means that even if prices are high, farm incomes may not increase proportionally, and indeed even fall, as the number of crops sold decreases.
The fact that farmers lack the financial means to store crops means that they are much less likely to have accumulated inventories to benefit from these sudden spikes.
The data on the daily onion rotation at the Lasalgaon market in Nashik district, one of the most important onion producing regions in the country, proves this (undoubtedly these data are only a representation of farmers’ income) . The data highlights two things. One, there is large-scale volatility in monthly onion turnover, which implies volatility in income for onion growers.
Two, periods of high inflation do not have to coincide with periods of high income for onion growers. For example, in 2019, wholesale price inflation for onions grew at a slower rate in July (7.6%) and August (33%) than in October (119.8%) and November (172.3 %). However, the turnover in July and August was much higher than in October and November.
Abhishek Jha contributed to this story
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