India's Onion Crisis: How the Government Can Stabilize Prices and Protect Consumers
The Indian government's recent attempt to procure onions from the market for buffer storage has been met with a lukewarm response. According to officials, the government aims to purchase 5 lakh tonnes of onions from the market, offering farmers ?21 per kg. However, this price falls short of the current market rates, which have soared to ?30-32 per kg. Consequently, the procurement drive has managed to acquire less than 10% of the target so far.
Surprisingly, this procurement initiative comes just a month after the government lifted the ban on onion exports. The resumption of exports has evidently reduced domestic supply and driven up prices. The Minimum Export Price (MEP) for onion at $550 per tonne works out to approximately ?45 per kg - this further incentivizes exports, leaving less for the domestic market. Furthermore, lower production in key onion-producing states like Maharashtra and Karnataka has exacerbated the situation, leading to a 15% price spike in the last month alone.
The surge in onion prices is part of the larger food inflation story that has gripped the nation. In May, food inflation reached a staggering 8.8% in urban areas and 8.6% in rural regions. The prices of essential vegetables like tomatoes, onions, and potatoes (TOP) have witnessed significant year-on-year increases, with tomato prices rising by 35%, onion prices by 58%, and potato prices by 44%. These soaring prices have severely impacted both rural and urban households, straining their budgets.
In light of this situation, we suggest that the government release its existing onion stockpile into the market to help stabilize prices. At the very least, the government should refrain from making substantial new procurements, which would further exacerbate market prices and worsen the current price inflation.
Interestingly, selling the current stockpile could present a profitable opportunity for the government. Given the ~30% increase in onion prices over the past 5-6 months, the government stands to make a significant arbitrage profit on its earlier procurement. These funds could serve as a buffer to mitigate any future shortfalls in production that can be caused by adverse weather conditions or water scarcity. In such scenarios, the government could even consider importing onions to ensure a steady supply. Moreover, the accumulated funds from selling the existing stockpile can be utilized to drive procurement once prices have stabilized. This strategic approach would allow the government to maintain a balanced buffer stock without further inflating prices.
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As suggested in a previous post*, the government should consider acting as an intermediary to control the high volatility in vegetable prices. Over the past 5 years, vegetable inflation volatility averaged around 18%, compared to under 5% for overall food inflation. By actively managing its procurement and sales, and leveraging arbitrage opportunities to fund such operations, the government can directly influence the market prices of key vegetables. This holistic approach would help shield lower and middle-class households from the devastating effects of food inflation, while maintaining a delicate balance between supporting farmers and protecting consumers.