In today's Finshots, we discuss why India keeps resorting to export bans and restrictions whenever onion prices shoot up.
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India doesn’t want onions to leave the country.
So we’re slapping a 40% export tax to discourage free movement. And the rationale is simple — we’re worried about rising prices. It's inching upwards slowly and the doomsday predictions are already here. Experts think it could touch the dreaded ₹100 mark very soon. And this is quite problematic because as per some estimates, an urban household spends ₹1,600 a month, on average, on food. Around ₹180 of this is typically on vegetables. So if onion prices shoot up, even buying one kilo of it will quickly consume over 50% of the vegetable bill.
You can’t run a household that way, no? It’s just not feasible.
But wait… is there a shortage of onions now?
Okay, let’s look at the onion production cycle first. The main onion season is the rabi crop. The crops are planted in December and January and harvested from March to May. Typically, these onions have a shelf life of six months and make up for 70% of the country’s needs.
But this year, there was a double whammy. We had unseasonal rains in March in some parts of the country. And we also had excessive heatwaves in other parts. This played spoilsport. The crop was under threat. And farmers freaked out. They harvested early and dumped onions in the market. The erratic weather kind of hurt the shelf-life of the onions as well.
The end result is that we might be running short of onions now before the next batch comes into the picture in a couple of months.
So yeah, you can see why we’ve tried to curb exports now. The hope is that we’ll have more onions for ourselves and tame these prices. People have already been hurt by tomato prices. So it won’t be a good look if onion prices shoot up as well.
And mind you, this is the typical policy whenever the price fear sets in. Since 2010, India has imposed an outright ban on export at least on 4 occasions. And added tax restrictions another 8 times.
But here’s the thing. Whenever we impose these bans, there’s always a counter argument to be made. People point to the second-order effects that come with such a move.
For starters, some people say that bans become a disincentive to onion farmers.
See, many Indian farmers have a tough life. They own small parcels of land and struggle to make ends meet. At the end of the day, The Plate reports that farmers at India’s largest onion market in Maharashtra usually end up selling 40% of their produce at a loss. Most farmers need prices to be at least ₹20 a kilo in order to net a small return. And that doesn’t happen. On average, the prices in the wholesale market over the past decade have been well below that mark.
So the only time they can balance things out is when they see the export market picking up. If the prices in global markets turn attractive, they’ll try and capture these higher prices.
But what if the government suddenly wakes up and decides to impose a ban? It snatches away these potential profits. It creates angst. And after a period of time, farmers might begin to wonder if they should continue with cultivation. They’ll try and look for alternative crops.
Sounds quite plausible and rational, no?
But the reality is that while this happens from time to time, over the long term, the area under cultivation for onion has continued to inch north. Maybe farmers haven’t really abandoned the crop despite its many problems. And maybe it’s also because the government has been pushing for onion cultivation in non-traditional growing states such as Madhya Pradesh too.
Then there’s another argument that says that policy flip-flops hurt our reputation in the international markets. That countries reliant on India for their needs might look for alternatives. And we’ll slowly lose market share.
But is that really true?
Maybe not. Because here’s the thing. At least when it comes to onions, we haven’t seen this play out. India has consistently been in the top three onion exporters in the world over the past decade. Despite tinkering with export bans.
And maybe that’s because other countries resort to such food protectionism too. After the Russian-Ukrainian conflict escalated, most countries began to look inward. They imposed restrictions on exports of their key commodities. For instance, Indonesia banned palm oil from leaving the country. Turkey stopped exports of butter. And in total, 23 countries resorted to such measures during that time.
So yeah, other countries may huff and puff when India imposes its own restrictions, but, deep down they probably realise that they would do the same thing if they were in India’s shoes. The trade relations continue.
But just because these second-order effects don’t actually play out, it doesn’t mean we keep relying on export bans to combat price rise, right? It’s like using tape to stop a leaky faucet. It doesn’t address why the faucet is leaky in the first place. And for onions, the root of the problem is — wastage. While we may produce 30 million tonnes of onions every year, nearly 10 million go to waste. They’re damaged in transit or left to rot at warehouses.
That’s the real problem.
So, what are we doing to deal with the core issue?
Well, here’s one idea — strike onions with gamma rays!
Yup, we’re not kidding. Apparently, irradiation therapy before sending it into cold storage works wonders and prolongs shelf-life. The hope is that it can cut the onion losses to just 10%. Now while this experiment is still in a pilot stage and we don’t know what will come of it, let’s keep our fingers crossed.
Until then…maybe set up more storage facilities?
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