The Indian agricultural sector is that of storage. Agriculture is a seasonal activity, makes it impossible to grow crops throughout the year. So yields are produced during their season and stored in warehouses to be consumed even during the offseason.
Now in the absence of storage facilities, everyone would be starving during the off-season. The sad truth is that India’s storage facilities are insufficient, and because of inadequate storage facilities, as much as 16% of our total agricultural produce is wasted. Low storage makes it hard to meet the demand during the off-season. As a result of this, the price of several crops increases.
This sudden and sometimes unrealistic hike in prices is met with unrest and protests among citizens because citizens find it expensive to put together a simple meal. We need better storage facilities to solve this issue, but we know that the public sector’s efficiency hasn’t been excellent with these initiatives in the past.
What about the private sector? Why can’t they build storage facilities?
Because the private sector often promises its customers that they’re going to offer standard prices throughout the year. So why can’t they build warehouses to make this promise happen? And the answer is the private sector is not incentivized to create these warehouses because of a 65-year-old act called the Essential Commodities Act, known as the ECA. According to the ECA, the supply and storage of essential commodities are regulated. This means that the government says that you can’t store more than what we tell you to. So why did the government regulate storage? Every time there was a hike in the price of a particular crop, the supply was too little, and the demand was too much.
To increase supply, if a stocking limit had to be imposed on these warehouses, asking these warehouses to get rid of whatever extra stock they were piling up meant the supply would increase, and the prices would start moderating.
However, did this work as expected? not really. For this, we have to take the case of the onion price hike in the year 2019. In 2019, the price of onions sold from a mere seven rupees to rupees 200 kg, which is quite a steep hike.
How did such a steep hike happen?
To answer this, we must know the back story of how onions are grown in the country. So onions are grown during two seasons the Rabi season, during April and May, and the Kharif season, which is during October and November. Now in August of 2019, struck India with a very heavy monsoon. A lot of onions stored in these warehouses were destroyed because of flooding. As a result, onion prices increased from rupees 7 per kg in January to rupees 80 per kg in September.
To increase supply, the government imposed a stocking limit asking these warehouses to get rid of whatever stock of onions they had piled up. Now, this worked initially, and prices moderated to an extent. Still, at this point, everyone was eagerly awaiting the next season where harvest onions, which was the kind of season during October and November.
However, the rain gods weren’t kind at all, and many of these fields experienced flooding. As a result of this, very few crops started making their way into the market. Since the government had earlier imposed a stocking limit asking these warehouses to get rid of whatever extra onions they had piled up, India’s warehouses were almost depleted of onions, so the price soared to 200 rupees per kg.
India was so depleted of onions at one point that we had to import onions. So a law that was put together to prevent price hikes further increased prices and didn’t encourage private investors to invest in storage. So what do we do with such a law? The right answer is to change it, and this is what the government has decided to do after 65 years of regulating storage; the government has decided to do away with stocking provisions.
This is a great leap towards freeing up the agricultural market to encourage private investors to invest in storage facilities and to reduce the fluctuation in prices that we often encounter.