An export ban didn't cool onion prices. Now what?

At ₹33.34 a kg, the all-India average onion price in the retail market was 41.3% higher than the previous year on Wednesday, data from the consumer affairs ministry showed.

“It (the ban’s extension) could be either till June or September; the possibility is more till June as elections will be around that time, and the government certainly cannot afford prices of food commodities, especially onion, to go up," the official said on condition of anonymity. “Once the elections are over, the government may review the decision whether to extend the ban further, depending on the market situation."

The Centre clamped down on onion exports in December, after imposing a 40% export duty in August and hiking the minimum export price to $800 per tonne. The decision was taken amid concerns over domestic production shortfall caused by irregular rainfall, pushing prices up.

The latest development comes in the backdrop of the country’s falling onion production playing out on prices.

Onion output in the 2023-24 crop year (July-June) will fall 15.6% to 25.4 million tonnes, according to the agriculture ministry’s latest estimates, because key growing regions such as Maharashtra, Karnataka, Andhra Pradesh and Rajasthan received weak rainfall last summer.

Queries sent to the ministries of agriculture & farmers welfare, and consumer affairs, food & public distribution remained unanswered at press time.

Last week, the World Meteorological Organization (WMO) said the 2023-24 El Nino was among the five strongest on record and will continue to impact global climate in the coming months despite a weakening trend. The UN agency also said above-normal temperatures are predicted over almost all land areas between March and May.

“Every month since June 2023 has set a new monthly temperature record—and 2023 was, by far, the warmest year on record. El Nino has contributed to these record temperatures, but heat-trapping greenhouse gases are unequivocally the main culprit," said WMO secretary-general Celeste Saulo.

Erratic rains sparked a price shock in onion last year. Average retail prices of the kitchen staple started inching up from July 2023 and reached a peak of ₹80 a kg in November. This was caused by 8-10% lower acreage under kharif onion year-on-year (y-o-y), coupled with the adverse impact of unseasonal rainfall on onion yields in Maharashtra. This prompted the government to ban its exports and deploy cooperative bodies to sell it at subsidized prices.

Late kharif onion varieties typically cater to consumer demand for January and February. However, reported lower arrivals of the late kharif varieties towards the second half of February this year led to a price hike of 29% y-o-y.

Now, the lower rabi or winter onion sowing and, thereby, a fall in output this year could lift prices further and put upward pressure on inflation, farm experts said. “Despite the anticipated arrival of rabi onion from March, onion prices are expected to remain firm going forward," said Pushan Sharma, director-Research, Crisil Market Intelligence and Analytics. “This can be attributed to lower acreages under crop in key states of Maharashtra and Karnataka on account of lower reservoir levels during the sowing and transplanting period for rabi 2024."

Additionally, a government plan to acquire buffer stock as insurance against price rise might keep the onion market tight, according to traders.

“When government agencies like Nafed and NCCF start procuring onion for its 500,000 tonne-buffer stock, there could be supply tightness in the market as farmers will be keen on selling off their produce to them. Traders and exporters purchase separately. Overall, this could lead to price rise amid lower output," said Sanket Hoge, a Mumbai-based agri-export consultant.

Retail food inflation rose to 8.66% in February 2024, from 8.3% the previous month and 6% a year ago due to a sequential rise in vegetable and meat prices. Although inflation in vegetables was 30.25% last month compared to 27.03% a month ago and 11.5% in February 2023, onion inflation eased to 22.1% from 29.4% in January; however, it increased from (-) 30.2% a year earlier.

Onion prices shot up significantly since the last general elections in 2019. On 13 March 2019, the all-India average retail price was ₹15.87 per kg, which has seen an increase of 110% to date.

Not everyone is impressed with the government’s approach. Ashok Gulati, distinguished professor at the Indian Council for Research on International Economic Relations, said that the moves showed a clear bias in favour of consumers, “but often it costs farmers because when prices went up, growers of wheat, rice and onion could not take full advantage of it. So, in a way you are transferring resources from farmers to consumers, which is not a great policy".

“The real policy should be protecting the most vulnerable and the remaining ones should be aligned to the market," Gulati said. “If the government must enter, it should be only a marginal intervention. If you are saying poverty has come down to 5%, why are you giving free foodgrain to 60% of the population? That’s where the conflict is. Farmers want higher prices, and that’s why there is a demand for raising the MSP (minimum support price) while consumers want everything at a very low price or preferably everything free. Balancing the interest of producers and consumers is a job of the political masters."

“My feeling is it is election time, and consumers, especially urban consumers, always get priority because they are larger in number," Gulati added.