Five points on food inflation and onions

Five points on food inflation and onions

Retail inflation hitting double digit being attributed to high food prices, but is it so?

When the National Statistical Office (NSO) declared that food inflation was 14.1 per cent in December 2019 due to spiralling vegetable prices, farmers in Karnataka were already doing distress selling of onions.

The food inflation in December last year is the highest in six years. Three vegetables — potato, onion and tomato — seem to have driven this high inflation. Their prices rose at 37 per cent, 328 per cent and 35 per cent respectively, according to the NSO report. This price rise is on a year-on-year basis.

So, when onion farmers in Karnataka, who were selling at Rs 200/kg just a few weeks ago, had to distress sale at around Rs 40/kg in the last few days, the pertinent question becomes: Is onion the culprit as it is being made out to be?

First, according to the International Food Policy Research Institute (IFRI), India has been experiencing high food inflation post-2009 when a severe drought brought down agricultural production. But even after this year, high food inflation continued till 2015-16. Since then, it has been at moderate levels.

In an analysis of food inflation during 2006-2015 in India, IFPRI found it has been above seven per cent for all years except 2014 and 2015. In November 2013, it reached the highest — 14.72 per cent.

In December 2019, negative growth, or deflation was recorded at -2.65 per cent. After 2009, it was assumed that production would pick up, thus reducing food inflation. But it never happened, pointing at other structural issues that trigger food inflation.

Second, are these three vegetables (that are important in the Consumer Price Index basket) always responsible for high inflation? According to the decadal analysis by IFPRI, onion contributes just two per cent to overall food inflation while tomato contributes an insignificant one per cent. Rice contributes around 11 per cent. Milk at 22 per cent has the highest impact on food inflation.

There is, in fact, no standard trend to show which item generally impacts food inflation. But it depends on situations in a specific period. The current inflation seems to have been caused by both, onion and milk price rise.

Third, does this mean farmers are finally reaping a moderate, even though temporary, economic harvest? The onion farmers are certainly not gaining out of this unprecedented price hike.

The new harvests entering the market now have already corrected the price, like in Karnataka. To begin with, the government imported onions to curb inflation just before they could harvest and transport their produce to market.

Add to that the heavy damage they suffered due to extreme weather events. It means they have less quantity of onions to trade. Along with imported onions, the first flush of domestically-produced onion resulted in an immediate fall in prices, as we now see in Karnataka.

Fourth, onion is a highly profitable crop. But only if it reaches the market in the right condition and at the right time.

According to a committee set up by the government to recommend ways to double farmers’ income by 2022 as promised by Prime Minister Narendra Modi, an onion farmer just gets around 43-44 per cent of the price at which s/he sells. Due to lack of proper storage and transportation, an onion farmer loses around 14.4 per cent of his / her produce, thus, further reducing earning.

Fifth, onion farmers are staring at a major market glut in the next four to five months. Irrespective of damages due to weather conditions last year, the market will be flush with new produce now.

In Karnataka and neighbouring states, onion rates are coming down due to this. The government has already put orders for over 36,000 metric tonnes of onions that have started arriving. In May, Indian farmers would add on to this when the second onion crop is harvested. This will flood the market, thus bringing down the price to an unsustainable level.  

Down To Earth