Reforms needed to fix volatility in prices of tomato, onion and potato

The kitchen staple has gone from being pricier (per kg) than petrol (per litre), to being cheaper than packaged water at the wholesale level, prompting farmers to dump produce rather than incur losses in transport and storage.

In February this year, rates of onion in Maharashtra, the largest grower, plunged below the cost of production, not because of any large drop in exports, but on account of inadequate and costly storage. Farmers were stuck. While it costs a grower at least ₹10-15 to produce a kilo of onion, wholesale prices then were between ₹2 and ₹5.

Such price volatility also impacts the broader economy. Last month, while keeping the benchmark interest rate unchanged at 6.5% despite July’s inflation rate soaring to a 15-month high due to a spurt in tomato prices, Reserve Bank of India (RBI) Governor Shaktikanta Das said the “challenge of high inflation still persists and has to be effectively addressed”.

“The food group inflation more than doubled from 4.7% in June to 10.6% in July. New arrivals of tomatoes in mandis are already softening the prices and coupled with proactive supply management in the case of onions, we see an appreciable slowdown in vegetable inflation,” he added.

Food policies that are less restrictive and more investment friendly can help minimise post-harvest losses by creating the infrastructure needed to store and process perishables, analysts say.

The Union government had rolled back three liberalising farm laws in 2021 following widespread opposition from farmers, who suspected the legislation would lead to withdrawal of state support and make them vulnerable to exploitation by large corporations.

“The farm laws would have attracted huge investments in production as well as post-harvest infrastructure. It is already happening (in states) where some liberalisation as proposed in the laws has been done,” said Ramesh Chand, the head of agriculture in the state-run think-tank, Niti Aayog.

Current policies dissuade traders from storing large quantities of food commodities, a measure aimed to control cartels and hoarding, which is not uncommon. However, such restrictions have also stifled investments in food-storage and processing infrastructure.

The government often uses a measure known as stock-holding limit, which sets restrictions on how much quantity of food items traders can store at their end. This lays bare the contradiction of keeping food prices low and farm incomes high in a country where half the population depends on a farm-derived income.

Some economists argue that if sellers aren’t allowed to store sufficient quantities of a commodity, investments to create modern storage capacities don’t take place, ultimately hurting farmers.

According to a 2020 study – All-India cold-chain infrastructure capacity (assessment of status and gap) – conducted by NABARD Consultancy Services Private Ltd, there have been infrastructural gaps ranging from 10% in the case of cold storages and 99.6% in the case of pack houses (cold storages that also take care of quality, packing and transportation) compared to what is required for perishable produces. “Insufficient private investment in such infrastructure and logistics is one of the principal reasons for such gaps,” the study notes.

One of the now-repealed laws – the Essential Commodities (Amendment) Act 2020 – laid down a policy of not intervening in food markets except under “extraordinary circumstances” so that traders could maintain large food stockpiles, which they argue is necessary to achieve economies of scale, a phenomenon of decreasing costs with increasing volumes.

The law stipulated that stock limits could be imposed only if there was a 100% increase in retail prices of perishable food commodities compared to the “average retail price in the last one year or the last five years, either case”. For non-perishable items, stock limits could be imposed if inflation in a commodity was more than 50%.

The government’s Economic Survey 2019-20, which devoted a full chapter to the issue of such price swings, stated that measures such as frequent tinkering of domestic food policies distort the agricultural trade. It cited evidence to say that stock limits were “totally ineffective in curbing inflation”.

Other experts, such Kavitha Kuruganti, one of the representatives of farm unions protesting the laws, disagrees. “Freeing up essential items from strict oversight was akin to giving a free pass to black marketeers.”

Some of the logistics reforms proposed in the farm laws are now being renewed through the government’s Gati Shakti initiative, which seeks to integrate all modes of storage and transport. “Constant government tinkering is the main reason for farmers’ losses,” said Anil Ghanawat, a Supreme Court nominated member of a panel that scrutinised the now-repealed farm laws.

Reforms in farm-marketing value chain are imperative, said Ghanawat, also because of changing patterns of cultivation. In most years, there will be oversupply of horticulture produce, he said.

India is the second-largest producer of fruits and vegetables in the world, contributing about 9.3% share of global output. The production of horticultural crops has outstripped cereals at nearly 326.6 million tonnes, driven by tomato, onion and potato.

Although Indian farmers grow 175 varieties of vegetables, tomato, onion and potato contribute 51% of total vegetable production, in which potato contributes the maximum 27%, followed by onion (13.5%) and tomato (10%), according to official statistics.

According to data cited in a 2021 study, food worth of ₹92,651 crore is lost in post-harvest processes before it reaches the consumer. “This monetary value is approximately 40% of the total produce in India, making India one of the few countries to have higher post-harvest losses while the government spending is just about 1% of the country’s GDP in food distribution,” states the study by the Hyderabad-based Indian Society of Agricultural Marketing.

Market inefficiencies also contribute significantly to price volatility, according to evidence cited by former chief economic adviser Krishnamurthy Venkata Subramanian in the Economic Survey 2020-21.

Most of the country’s food trade happens in tightly regulated market yards called agriculture produce marketing committees (APMC). “Agricultural produce market committee regulations have resulted in a number of inefficiencies and consequent loss to the farmers. Presence of multiple intermediaries between farmers and final consumers has led to low realisation by farmers,” the survey stated.

The Economic Survey 2020-21 pointed out that a larger number of taxes and cesses levied by state-run mandis or regulated markets have “cut into farmers’ price realisation and poor infrastructure at the mandis compounds the problems”.

It states how the delay in selling perishable produce at these markets due to lack of modern sorting and grading facilities leads to post-harvest losses of up to 4-6% in cereals and pulses, 7-12% in vegetables and 6-18% in fruits, making a case for the farm laws.

Those backing the farm laws argue that The Essential Commodities (Amendment) Act 2020 rightly removes commodities such as cereals, pulses, oilseeds, edible oils, onion and potatoes from the list of essential commodities. “This aims to remove fears in private investors from excessive regulatory interference in their business operations,” argues Subramanian, now an executive director at the International Monetary Fund.

Attempts to reform food marketing unleashed staunch protests by farmers in 2020, leading to the scrapping of three pro-reform farm laws — The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, and Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 and Farm Services and the Essential Commodities (Amendment) Act, 2020.

Economist Ashok Gulati, the distinguished professor at the Indian Council for Research on International Economic Relations, said reforms such as The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 would have granted freedom to farmers and buyers to transact in “agricultural commodities even outside notified APMC mandis ensuring competitive alternative trading channels to promote efficient, transparent and barrier-free interstate and intra-state trade”.

Kuruganthi, one of the negotiators on behalf of farm unions, disagrees, citing the case of Bihar, a state which doesn’t have APMC mandis but still suffers from abysmal farm-marketing infrastructure. She argues that the law would have led to monopolies in the food business.

To be sure, as a HT analysis in 2021 showed, just around 3% of vegetables in India are sold through APMC mandis.

The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020 was aimed to enable a national framework on contract farming.

Ghanawat, one of the Supreme Court-nominated members of a panel to scrutinize the laws, said such reforms would have spurred industrial-scale engagement of farmers with agri-business firms, processors, wholesalers or large retailers for farm services.

“The main issue with it was that a violation of a contract wasn’t directly contestable in a civil court and the first recourse for farmers would have been the district authorities. That is not acceptable,” said Gurnam Singh Chaduni, a farm-union leader.

Poor infrastructure at the mandis, issues related to “manual weighing, single window systems and lack of modern grading and sorting processes create long delays and measurement errors that tend to be biased against the seller”, according to former chief economic adviser Subramanian.

All told, more investment in storage and cold chains is a crying need to avoid frequent price swings in perishables.

Read here: State begins transfer of ₹300 crore subsidy to 3 lakh onion farmers

There are about 7600 cold storages countrywide, which account for 34.9 million metric tonnes of storage capacity but their distribution is very uneven. Around 59% of the storage capacity, which comes to 21 million metric tonnes, exists in the four states of Punjab, Uttar Pradesh, Madhya Pradesh and Gujarat.

“That the agriculture sector needs reforms is obvious,” says Arunim Saikia, an economist with the North Eastern Hill University.

“But the issue with the farm laws was not economic but political. It was a trust issue.”