4-MIN READ

Understanding Food Price Inflation: When Farmers Grow Onions But Get Peanuts

Image for representation. (Photo: Reuters)

Image for representation. (Photo: Reuters)

The benefit of high prices that consumers have to pay rarely percolates down to the farmers. Several studies have shown that a battery of middlemen and traders walk away with the bulk of the gains.

Devinder Sharma
  • Last Updated: January 17, 2020, 4:56 PM IST
Share this:

It was the last few days of 2018 and onion farmers were dumping their produce on the streets. That’s because prices of the vegetable had crashed to staggering lows. Reports of onion farmers getting rates less than Rs 2 a kilo adorned local newspapers. Some had even acknowledged receiving a price as low as 30 to 50 paise per kg.

While farmers suffered, consumers were visibly happy. And so were the mainline economists. After all, food price inflation had come down to an 18-month low. The consumer food price index had come down to minus 2.65 per cent, pulling down the consumer price index to 2.11 per cent.

Strangely, there was no hysterical media drawing the nation’s attention to the farmers’ plight. Nor did we see any mainline economist, including those with the credit rating agencies and private sector banks, raise concerns over declining farm incomes. This was also at a time when the Niti Aayog had acknowledged that real farm income growth was ‘near zero’ continuously for two years. In another study, the government think tank had found that in five years till 2015-16, real farm incomes had grown by less than half a per cent every year, 0.44 per cent to be exact. Even this had failed to evoke a policy response from the monetary policy committee of RBI which remains obsessed with keeping inflation low. What happens to the livelihoods of millions of farmers and farm workers in the process is not its concern.

A year later, in December 2019, when consumer price index climbed to 7.35 per cent, essentially with retail food prices soaring to 14.12 per cent, driven mainly by price rise in onions and to a lesser extent in tomatoes, pulses, meat and milk, the media as expected went hysterical. The same media which conspicuously kept quiet last year when farmers were severely hit by low prices, is now questioning how the poor will be able to afford vegetables at such high prices. Economists, including those with brokering agencies, are debating whether higher food inflation at a time when the economy is expected to expand only by 5 per cent will lead to stagflation. With inflation going beyond the monetary policy band of 6 per cent (4 per cent, plus and minus 2 per cent) and fiscal deficit getting out of control, some economists are even calling for a review of the monetary policy, questioning whether it is capable of tackling inflation.

How the monetary policy can control rise in prices caused by supply-side constraints remains a puzzle. Agriculture and farmers welfare minister Narendra Singh Tomar told the Lok Sabha that a shortfall in onion production by over 15.8 lakh tonnes has led to the spike in onion prices. This was primarily because of unseasonal rains, which lashed parts of southern and central India after the period when monsoon normally withdraws, in the month of September. A total area of nearly 64 lakh hectares was battered by incessant rains, which extended to early November, causing damage to standing crops. Much of the rain damage was in Maharashtra and Karnataka which produce nearly 50 per cent of the country’s onion output. While Maharashtra received 1.5 times the average rainfall, untimely rains hit 45 per cent of the area under onion production in Karnataka.

Higher food prices, especially that of onion, had also raised the wholesale price index (WPI) to a 7-month high of 2.59 per cent in December. But whether the benefit of a higher wholesale price went to farmers was perhaps best reflected by a video of a crying farmer from Ahmednagar in Maharashtra, which went viral on social media, who was able to sell onions for only Rs 8 per kg. At a time when onion prices were ruling at a high of Rs 100 per kg, this farmer said he had employed extra labour to pull out the crop during heavy rains and what he got in return was peanuts. This is generally the story of farmers everywhere.

The benefit of high prices that consumers have to pay rarely percolates down to the farmers. In case of onions, traders purchase the crop when prices are low, store it in warehouses, and release it into the market when prices are favourable. It is known that a strong cartel of middlemen operates in onion trade, a nexus that successive governments have failed to break. Nevertheless, several studies have shown how a battery of middlemen and traders walk away with the bulk of the food price rise gains. Market prices of pulses last year, for instance, had on an average prevailed at 10 to 25 per cent lower than the minimum support price (MSP) announced. Tomato, onion and potato are the three major vegetable crops that have been hit time and again by volatility of markets. It is primarily because of low price realisation by farmers that the demand of increasing and extending MSP to all crops remains steadfast. Even if the MSP does not cover the cost of production that farmers incur, it at least provides them an assured price.

If only there is an improvement in supply chain management, which can ensure a higher proportion of the consumer price flowing to the farmers, there is scope for boosting rural incomes. However, what we are seeing is that when food prices increase, the consumer pays a much higher price without an accompanying increase in farmers’ income. Unless middlemen’s share in the food chain gets minimised or eliminated, there is little hope of farm incomes going up.

(The author is an expert on agriculture, and a food and trade policy analyst. Views expressed are personal)

Share this:
Next Story

India

  • Active Cases

    3,851

     
  • Total Confirmed

    4,281

     
  • Cured/Discharged

    318

     
  • Total DEATHS

    111

     
Data Source: Ministry of Health and Family Welfare, India
Updated: April 06 (06:00 PM)
Hospitals & Testing centres

World

  • Active Cases

    989,632

     
  • Total Confirmed

    1,342,372

     
  • Cured/Discharged

    278,182

     
  • Total DEATHS

    74,558

     
Data Source: Johns Hopkins University, U.S. (www.jhu.edu)
Hospitals & Testing centres