India’s Onion Dilemma

The Daily Star  September 27, 2020

When India imposed a ban on onion export on September 14 this year to check its soaring price in the domestic market, the criticism of the government’s action, mainly from farmers, was louder than it was less than a year ago when the same prohibition had gone into force. The reason was simple: last year when the ban was implemented, the price of onion in the domestic market had ranged between Rs 100-150 per kilo. This September, the price was in the range of Rs 40-45 a kilo when the export ban was announced. One of the main reasons for soaring price this year is excessive rain and flood in the major onion growing areas. But one cannot ignore the role played by an artificial shortage created by onion traders both at wholesale and retail markets and middlemen.

So, did the Indian government this time come out with a knee-jerk reaction? Could it have waited for some more weeks when the price could have risen further and then act? Not that onion prices in domestic market showed a downward trend post-export ban of September 14. In fact, it went up to Rs 50 55 per kilo. However, the ban may have slowed down the price rise. But it amply summed up the web of issues that defy an easy solution.

One easy answer for the September 14 ban on onion export was that it was done to ward off any negative impact the rising prices of the kitchen staple would have on the people of the eastern state of Bihar where fresh assembly elections are due in October this year. The Bharatiya Janata Party and its bigger ally Janata Dal (United) led by Chief Minister Nitish Kumar are keen to return to power in Bihar. So, the BJP-led federal government headed by Prime Minister Narendra Modi obviously did not want to take any chance with the onion price which had proved the saffron party’s Achilles’ heel in the elections in the past. It may be recalled that last year, there was no such immediate electoral compulsion to rein in onion prices before the ban was imposed in September. In fact, at that time, India had gone for imported onions from Egypt, Afghanistan and Turkey to tame domestic price. Another worry for the government over rising onion prices this year was that the latest data on consumer price index-linked inflation for August was 6.69 percent, higher than the Reserve Bank of India’s (RBI) upper target limit of 6 percent.

So, should India go for export ban on onion or for that matter any other agriculture produce to check prices at home? The opinion, as usual, remains divided. One view is that if the government resorts to banning exports to control prices, it hurts farmers’ interests. But what about consumers’ interests? No government can be mindful of just one side and be oblivious of the other. Clearly, there is a need to strike a balance between the two and that is easier said than done.

Whenever onion prices in domestic markets go up, the government has exercised two options: i) impose minimum export price and if that does not work; ii) ban export. Last year, the government had chosen a graded approach by first imposing minimum export price and when that failed to put a brake on the rising price, it went for the export ban. This year, the government did not go for a calibrated approach. It skipped the first option and jumped to the second, reflecting a sense of urgency primarily with an eye on Bihar poll.

Act. The aim was to ensure the market forces are allowed free play in availability and pricing of these goods.

The ordinance was replaced by a bill which got the stamp of parliamentary approval on September 22 in what was touted as a major farm sector reform. The bill allows traders, retailers and exporters to stockpile the six commodities without having to incur any penalty. However, the legislation also envisages that the stock-holding limit, which is an instrument to check surging prices, will come into play only in case of “extraordinary circumstances” like war, natural calamity or a situation of substantial price rise in order to protect the interests of the consumers. This makes it clear that any talk of completely free market and deregulating a sector is a myth because any government of the day cannot allow a free-for-all. This means exports will be allowed only as long as local prices remain under control. Economics can seldom be delinked from politics.

The problem with onion, and any agricultural produce for that matter, is that it remains subject to the vagaries of weather and price fluctuations. It has been suggested by some that one solution to ensure that high onion price does not pinch the consumers is to cut duties and taxes on petrol and diesel that will give households a lot more breathing space. It has also been suggested that a ban on exports cuts the farmers’ income from onions and thereby escalates the agrarian crisis. A major flaw in the second suggestion is that it does not take into account that the benefits of the rise in agricultural produce prices do not always reach the farmers and are siphoned off by middlemen and commission agents who help take the produce to local wholesale markets.

Another argument against onion export ban is that it hurts India’s goodwill as a dependable exporter. A lot of effort goes into building export markets. Bangladesh, Sri Lanka and the UAE are among the largest markets for onions from India. No doubt, the onion export ban by India in 2019 and 2020 did create misgivings in Bangladesh, the biggest importer of Indian onion. Prime Minister Sheikh Hasina had hinted at her displeasure last October when she had visited New Delhi a few days after the ban was clamped in 2019. This year, the Bangladesh Foreign Ministry wrote a letter to its Indian counterpart asking the Indian authorities to ensure that Bangladesh is not inconvenienced by the export ban.

A viable option for India, as recommended by economists from time to time, is to have a buffer stock of all essential foodgrains and release them into the market in times of shortage or soaring prices in order to insulate consumers on one hand and protecting farmers from the burden of anti-inflation measures on the other. A credible buffer stock hinges on the creation of a countrywide network of storage facilities for crops. There is a home and the world for India to take care of when it comes to foodgrains and therein lies the dilemma.


Pallab Bhattacharya is a special correspondent of The Daily Star. He writes from New Delhi, India.

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