Political situation could justify Centre’s export duty
The government imposed a 40 per cent export duty on onions in August, which will be effective until December. There is a need to ensure the adequate availability of onions for domestic consumption and stabilise onion prices.

The prices have increased due to the recent monsoon adversely impacting the onion harvest. The export duty on onion discourages its export and adversely impacts farmers’ incomes. Owing to the export duty hike in India, prices in Bangladesh, too, have risen by as much as 50 per cent, effectively shutting down the market. While Nepal had stopped the import of onions in August, it resumed importing them in September due to soaring local prices of onions, anticipating a more significant price rise in the face of the festive season.

The global prices of onions are also set to rise with demand overshooting supply. The disruption of the food supply chains can also lead to the shutdown of importing markets till alternative chains are set up, such as in the case of Bangladesh. This non-WTO-compliant behaviour has also led to issues for local onion farmers, who have lost a significant percentage of their sales, which would have otherwise gone to customers overseas.

Domestic shortage

Despite these criticisms, the duty hike seemed necessary considering the situation in the domestic market and the past effects of onion shortage on the economy as a whole. According to the Ministry of Consumer Affairs, Food and Public Distribution, retail prices of onion rose by nearly 500 per cent during April-December 2019, causing social and political uproar; not an uncommon occurrence.

Onions have been a vital element in the political outcomes of this nation — be it the re-election of Indira Gandhi through her ‘Onion Elections’ or the fall of the Vajpayee government, partly due to the skyrocketing prices of onions. Historically, the prices of vegetables have controlled the public sentiment towards the party in power. Hence, governments always look to preserve the stability of onion prices and supply by maintaining buffer stock, increasing export taxes, or both. The Modi government came under pressure during the onion shortage in 2019, and a repeat of the same so close to the next general elections will not be risked.

Global repercussions

Being among the largest exporters of onions globally (12 per cent of world trade, after The Netherlands and Mexico), India’s policy actions have affected the global onion economy. Few states in India hold significant clout over onions, with Maharashtra and Madhya Pradesh accounting for 42.73 per cent and 15.23 per cent, respectively, of the 28 million tonnes produced last year.

These exports go to some of the largest onion-importing countries, worth almost $174 million to Bangladesh, $65 million to Malaysia, and about $37 million each to the UAE and Nepal. This disruption will lead to the creation of alternative supply chains from other nations. These include China, The Netherlands, Spain and Mexico; they would quickly fill up the supply gap left by India.

However, this won’t come without the effects on their domestic markets, whose prices would rise owing to the supply reduction there. Global prices would rise, anyway. Overall, while India faces criticism for its actions, especially considering its position as a G20 nation that promotes trade, the export tax is justified given the political economy of onions. This onion ban certainly fulfils its primary goal of arresting the rising domestic onion costs, although at the possible cost of diplomatic relations with some countries.

This article has been co-authored by Parth Basankar, Undergraduate Student, FLAME University, and Prof. Yashobanta Parida, Faculty of Economics, FLAME University.