Onion Prices and State Intervention

Onion prices have been a politically volatile issue for state governments, especially since the BJPs electoral debacle in Delhi in 1998. Market intervention by government has thus become a tool to regulate the supply and prices of onions. Recently, during a spike in onion prices, the Andhra Pradesh government used market intervention to stabilise prices.
SUDHIR B
exports are allowed only after domestic requirements have been met, which may be the cause of fluctuation in exports and domestic prices from year to year. In the market system, resources are allocated through the price mechanism, where supply and demand meet. This allows the price to act as a rationing mechanism, reallocating resources. In many cases though, this equilibrium price is far too high for many to pay and the government may have to intervene to protect the interests of the consumers. Governmental market intervention had its origin during the second world war, in the backdrop of the Bengal famine (1943) and the consequent shortages of food and essential commodities. Market intervention was initially aimed at benefiting government employees and others

nion is one of the most important vegetable crops grown in India. Although onion is grown all over the country, the major cultivating states are Andhra Pradesh, Orissa, Bihar, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu and Uttar Pradesh. These nine states account for 90 per cent of both area and output. In northern India, onion is usually grown in winter (rabi crop). In Andhra Pradesh and Maharashtra it is grown in the rabi as well as kharif seasons. Thus, onion is cultivated and available for domestic consumption and exports throughout the year. India is a traditional exporter of fresh onions. However,
Table 1: Area under Onion Cultivation in India
(000 ha)

considered crucial to the war efforts. Subsequently, when conditions worsened further, the scheme was extended to cover the common people. As the war intensified, free market operations were abandoned. India depended on imports to meet essential commodity requirements. Though controls introduced to ration supplies were tedious, they finally descended into the government of Indias food policy. Once normalcy was restored, free market operations were allowed. But since then, the government of India has made it a practice of observing the situation and intervening in the market whenever necessary to ensure availability of essential commodities to consumers to protect them from exploitation by traders. The Andhra Pradesh government has gone in for market intervention since 1998. Market intervention involves stabilisation of prices through procurement of essential commodities when/where the prices are low and distribution to consumers at reasonable prices when the ruling retail market prices are high. The process of market intervention involves decisions based on the following parameters: Identification of essential commodities which may need market intervention, based on the gap between the requirement/demand for each item and its production within the state;

Table 3: Production of Onions in Major Producing Countries

Area 300 310 320 370 380 400 400 400 470 490 Country China India US Turkey Pakistan Iran Russia Korea 1995 8.2 4.04 2.97 2.85 1.01 1.13 0.88 0.97 1996 9.64 4.08 2.91 1.9 1.1 1.2 1.06 0.58

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

(Mn tonnes)
1997 10.04 4.18 3.12 2.1 1.13 1.16 1.08 0.74 1998 10.84 3.62 3.05 2.27 1.08 1.21 1.05 0.87 1999 11.28 5.33 3.34 2.3 1.14 1.68 1.13 0.94 2000 12.18 4.9 3.25 2.3 1.65 1.5 1.32 0.88 2001* 12.44 4.7 3.25 2.3 1.5 1.4 1.11 1.07

Source: Department of Agriculture and Cooperation, Ministry of Agriculture, government of India.

Note: *Provisional data. Source: FAO. (Lakh ha)

Table 2: Statewise Area under Onion Cultivation

State 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 Per Cent Change from 1991-92 to 1999-2000 89.24 122.87 14.37 2.65 44.36 69.9 -12.42 53.63 32.98 21.21 52.58

Maharashtra Karnataka Gujarat Orissa Tamil Nadu Andhra Pradesh Uttar Pradesh Madhya Pradesh Rajasthan Bihar All-India

0.6 0.56 0.17 0.45 0.27 0.21 0.32 0.18 0.19 0.17 3.23

0.62 0.59 0.26 0.42 0.22 0.19 0.34 0.15 0.15 0.16 3.24

1.02 0.63 0.23 0.44 0.25 0.2 0.28 0.19 0.16 0.17 3.68

0.94 0.73 0.2 0.48 0.29 0.21 0.28 0.2 0.17 0.2 3.79

0.93 0.79 0.19 0.5 0.21 0.24 0.34 0.21 0.22 0.18 3.96

0.96 0.91 0.17 0.38 0.25 0.27 0.3 0.24 0.24 0.19 4.04

0.65 0.6 0.21 0.47 0.27 0.21 0.27 0.2 0.2 0.18 4.03

1.04 1.04 0.52 0.46 0.37 0.31 0.26 0.24 0.2 0.2 4.81

1.13 1.26 0.2 0.46 0.38 0.35 0.28 0.28 0.25 0.2 4.93

Source: CMIE.

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 Decision regarding need for procurement and fixation of target for procurement; Creation of storage capacities including ventilated godowns (for onions) and cold storage facilities (for chillies and tamarind); Entrusting the responsibility for procurement to governmental agencies such as the AP State Civil Supplies Corporation, AP Marketing Federation and AP Oilseed Growers Federation; Identification of places of procurement both within and outside the state; Keeping procurement costs at the lowest level, by procuring the commodity when prices are low; Taking steps simultaneously to increase production of identified essential commodities within the state; Regular and systematic monitoring of open market retail prices to identify high and low price centres and districts in respect of each essential commodity in the state; Distribution of essential commodities to consumers at affordable prices. There are several means of market intervention. These include: Rationing of commodities; providing subsidies; manipulating supplies (increasing market supply when there are shortages and procuring commodities when supplies are high and prices low; supplying through PDS/fair price shops/rythu mitra/rythu bazaars; advising on cultivation pattern; and providing subsidies for seeds, fertilisers and pesticides. The Essential Commodities Act, 1955 does not define essential commodity in a conceptual form as such. As per Section 2(a) of the act, essential commodity means any of the following classes of commodities such as Classical fodder, including oil cakes and other concentrates; Coal, including coke and other derivatives; Component parts and accessories of automobiles; Foodstuffs, including oilseeds and oils;

Any other class of commodity which the central government may by a notified order declare to be an essential commodity for the purpose of this act; Thus the act only lists the classes of commodities as essential commodities. The act confers on the central government the powers to control production, supply and distribution of essential commodities for maintaining or increasing supplies or for securing their equitable distribution and availability at fair prices. Essential commodities in daily parlance are mainly items that are consumed regularly. In a way it is a staple food to which the consumers have been habituated as an item of daily consumption. Hence the list of essential commodities may vary from state to state and region to region. In case of Andhra Pradesh, the following are identified as essential commodities for the purpose of market intervention: rice, red gram, groundnut oil, tamarind, chillies and onions. Onion, which is classified as a vegetable, is peculiar in the sense that it has special culinary, medicinal and market attributes. It is the worlds most widely produced and consumed vegetable, popular among all classes of people in all countries. Onion is relished even in its raw form, and has high nutritive and medicinal value. It contains both glucose (reducing sugar) and sucrose (non-reducing sugar). The special quality of onion is its smell (flavour), on account of which it is commonly used in food and masala preparations. The pungent taste of onion is due to the volatile oil allyl propyl disulphide present in it.

India is the second largest producer of onions in the world, next to China. In terms of area, India ranks first with over 4,90,000 hectares (Table 1) or around 17 per cent of the total world area under onion cultivation. The other major onion producing countries are Turkey, Pakistan, Brazil, the US, Iran, Spain and Japan. The area under onion cultivation in India has been growing steadily over the years. However, there was a remarkable increase in area after onion prices shot up abnormally in 1998. From Table 1 it can be seen that in just one year, area under onion cultivation increased by 70,000 hectares. Table 2 reveals a similar trend in Andhra Pradesh, where area under cultivation increased by 4,000 hectares in 1998-99, after the sudden price rise. Since then, the area has been largely steady. In agricultural year 2001-02
Table 6: Onion Prices
(Rs per kg)
Year 1998 1999 2000 2001 2002 2003 2004 Highest Price 22.88 8.89 6.49 8.71 7.42 9.34 10.07 Month October January December November October November January Lowest Price NA 4.13 3.01 3.64 3.39 3.78 8.30 Month NA April June May May March January

Source: Directorate of Economics and Statistics, Andhra Pradesh.

Table 7: Average Wholesale Prices in AP during Peak Marketing Period

(Rs per quintal)
1994-95 255.91 1995-96 381.75 1996-97 1997-98 1998-99 407.07 657.39 442.84

Source: Directorate of Economics and Statistics, Andhra Pradesh.

Table 5: Yield of Onions in India

(Kg/ha)
Yield India 1995 10,661 1996 10,316 1997 10,348 1998 9,091 1999 11,391 2000 9,932 2001 10,106

Source: FAO

Table 4: Production of Onions in India

(Lakh tonnes)
State 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 Per Cent Change from 1991-92 to 1999-2000 6.37 65.83 13.77 204.07 9.85 -18.84 58.62 49.06 54.74 36.68

Gujarat Maharashtra Karnataka Andhra Pradesh Orissa Uttar Pradesh Madhya Pradesh Tamil Nadu Bihar All-India

4.24 8.4 5.23 1.72 3.35 4.83 2.32 2.12 1.37 35.85

6.05 8.32 4.26 1.52 3.06 4.57 1.7 1.85 1.45 34.91

5.49 12.1 4.14 4.15 3.21 3.32 2.27 1.98 1.49 40.06

5.62 12.07 4.32 3.15 3.62 3.19 2.15 2.94 1.54 40.06

4.44 11.21 4.4 3.74 3.8 3.96 2.35 2.32 1.37 40.8

4.33 11.89 5.09 3.69 2.95 3.86 3.09 2.1 1.45 41.81

6.19 5.72 3.6 3.28 1.65 2.52 2.62 2.35 1.41 36.2

14.62 11.84 5.88 4.78 3.6 3.18 3.17 2.9 1.89 53.3

4.51 13.93 5.95 5.23 3.68 3.92 3.68 3.16 2.12 49

Source: CMIE.

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it was 32,000 ha and in 2002-03 it was 27,000 ha. In 2002-03, rains affected the crops to an extent. Onion is grown mainly in the districts of Srikakulam, Cuddapah, Ananthapur, Kurnool, Mahaboobnagar, Medak and Ranga Reddy. Total world production of onions is about 490 lakh metric tonnes, of which China produces 27 per cent (Table 3). Indias share is nearly 10 per cent, at 47 lakh mt per annum. About 11 per cent of Indias production is from Andhra Pradesh (Table 4). Indias onion production jumped from 20 lakh metric tonnes in 1974-75 to 55 lakh metric tonnes in 1998-99. The yield per hectare, however, is very low at 10.1 mt per hectare as against a world average of 17.1 mt per hectare. The rise in production was due to increase in area under onion cultivation from 1.95 lakh ha to 4.7 lakh ha. The share of Andhra Pradesh in the total production of onion is around 11 per cent at 5 lakh mt per year. Increase in acreage does not necessarily mean matching supplies with demand. The yield per year keeps changing as seen from

Table 5. Yield fell by 12 per cent from 1997 to 1998 but went up by 25 per cent in the next year. Rains could have been a factor, but the fact remains that there is always a mismatch between demand and supply. Demand for onions has also been rising over the years. Periodic shortages are observed in case of onion and each time the shortages are met through increase in price and imports. But the increase in price of an essential commodity like onion is electorally important.

Price Trends
Onion prices have become a matter of concern for state governments, especially after the BJPs electoral debacle in Delhi in 1998. Since the poor and rich alike in all the states in India consume onion, its price movements have political ramifications. Almost all state governments have started associating onion price movements to political fortunes. Table 6 gives an idea of the general price situation for onions. In mid-January 2004, onion prices in

Andhra Pradesh began rising and reached Rs 20 per kg at one point of time. However, the state government initiated quick measures to control prices, by importing from Nashik. In the first phase 10,000 quintals were procured. The state government distributed onions through rythu bazaars at a subsidised price of Rs 7 per kg, the subsidy being Rs 3.50 per kg. An estimated Rs 1.75 crore may have been spent on subsidising onions from mid-January till mid-March. This timely market intervention by the state government contributed to protecting the consumers and controlling the general price situation. This was evident from the fact that onion prices declined to Rs 7 from Rs 9 per kg at the retail level, in mid-March. Fresh arrivals after mid-March have cooled prices. This study shows that market intervention can be used to control the prices of commodities. Onion prices have effectively come down through such intervention and consumers have been protected. Rythu bazaars form an important arm in the process of market intervention. -29

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