(Co-authored with Radhika Pandey)
The Central Government recently issued a notification banning the export of onions. The trigger for this move was that the wholesale price of onion has seen a steady increase over the last two months. At retail markets, the price of onions is now around Rs 35-40 per kg as against Rs 25-30 per kg in the month of June. The recent rise in prices is mainly due to heavy rains in August that has affected the almost market ready onion crop in Karnataka that was supposed to hit markets in early September. While Indian onions are routinely exported to countries in the Gulf, Sri Lanka and Bangladesh, the demand from Sri Lanka has picked up due to destruction of their crops due to rains.
A supply crunch in the domestic market would cause a rise in CPI food inflation and would hurt consumers who are already reeling under the impact of the Covid-19 induced lockdown that sharply affected their incomes. The move is intended to provide relief to households who are sensitive to changes in price of onions. While the decision to ban onion exports favours consumers, it hurts farmers interests.
The Government has set a target of doubling farmers’ income by 2024. How would this be achieved? While some part of the increase in incomes can come from higher yields, some part will come from higher prices. In fact, if supply rises very fast, markets are flooded, prices crash and farmers end up throwing away farm produce. Scenes of tomatoes and onion on streets have been seen often enough in recent years.
The recent reforms including the three ordinances governing agricultural produce marketing, contract farming and an amendment to the Essential Commodities Act are aimed at providing barrier free trading platforms and ensuring better returns to farmers. The Government recently launched the Rs 1 lakh crore agri infrastructure fund under which start-ups, farmer groups, agri-entrpreneurs will have access to subsidised credit to build cold storage facilities, warehouses and other infrastructure to minimise post production losses. While these are all steps in the right direction, the recent announcement to ban onion exports has caused unrest amongst the farmers as it hurts their interests. Onion prices are highly volatile. While farmers suffer during excess supply and depressed prices, they are unable to reap the benefits of higher prices amid crop shortages and a surge in demand in the international market if price caps are imposed or exports are banned. Since supply is lower, the total income of farmers falls when the crop is destroyed. Higher prices would have allowed them to make up some of the loss in income.
The first quarter GDP fell 23.9% in the first quarter of 2020-21. The silver lining was agriculture and allied activities which grew 3.4% as compared to 3% in the corresponding quarter of last year. Normally, it is the manufacturing and services sector that drive GDP growth, but given the unprecedented crisis, agriculture is seen to be the bright spot. While better sowing and good monsoon augur well for agricultural growth, remumerative prices for farmers is needed to ensure sustained growth in agricultural Gross Value Added (GVA). The RBI Governor Shaktikanta Das in his recent address emphasised the importance of shifting the terms of trade in favour of agriculture. Favourable terms of trade is key to generating robust agricultural GVA. Agricultural exports enable farmers to take advantage of international terms of trade and technology.
How much a rise in prices of onions would hurt households would also depend on how important it is as part of the total household consumption expenditure. Research using the data from the National Sample Survey Organisation (NSSO)’s, consumer expenditure survey suggests that there has been a decline in the share of expenditure spent on food. Over the period 2004-05 to 2011-12, the proportion of consumer expenditure has declined the most for cereals, followed by vegetables and pulses. A higher share of expenditure was on milk, fruits, and eggs, meat and fish. While onions have become political hot buttons, the seasonal factors have always affected onion supplies. The high demand from urban consumers who expect a sustained supply of onions is a source of the politicisation of onion prices.
While the proposed amendments to the Essential Commodities Act protect exporters from the arbitrary export restrictions, the primary source of arbitrary and unpredictable restrictions emerge from the provisions of the Foreign Trade (Development and Regulation) Act, 1992. While the preamble of the Act states that it is an Act to augment exports, it gives powers to the Central Government to prohibit, regulate and restrict export of goods. Between 2014 and 2019 (five years) the government changed the rules on export of onion seventeen times, more than three times a year on average. Farmers who export have no stable legal regime. This is inimical to India’s image as a stable and reliable exporter of onions. Much more is needed to provide the legal framework which will facilitate international trade in agricultural commodities and enable Indian farmers to participate in international markets. Very often price caps are imposed on the export price. This time the government has banned exports.
While consumers are paying more for vegetables, farmers have not gained much. The gap between the wholesale and retail inflation has been the widest for vegetables and pulses and has widened further during the lockdown. The need of the hour is to address the supply disruption so that retail prices start moderating.
Ila Patnaik is Professor and Radhika Pandey is Fellow at NIPFP, New Delhi.
The views expressed in the post are those of the authors only. No responsibility for them should be attributed to NIPFP.
The article was published in The Print on September 18, 2020.