Onion Prices: Will 40% Export Duty Impact Farmers, Consumers?

Sky-high onion prices have dented pockets of Indian citizens who are already struggling to keep up with a stubbornly high tomato prices. However, onions are acting as a spoilsport, they're expensive and have created uncertainties for the economy, concerning the central government. To tackle its impact on inflation, the Finance Ministry imposed a 40% export duty on onions and also increased the procurement limit. The export duty is believed to be justified, however, it is also expected that skyrocketed onion prices may hurt the government more than compared to the surge in tomato prices. However, farmers are likely to benefit from the development.

Onion prices have seen a significant climb since June month. Earlier, data from the Department of Consumer Affairs showed that all-India monthly average wholesale prices of onions have surged rapidly in three months. Onion prices jumped from Rs 1,656.45 per quintal in May 2023 to Rs 1,729.73 a quintal in June and further soared to Rs 1,999.16 a quintal in July. In August so far, the price has averaged to Rs 2,189.17 a quintal.

On month-on-month wise, onion prices spiked by 15.6% in July and are up by 9.5% in August so far.

Following this, vegetable prices have impacted inflation in July which accelerated higher than expected to 7.44%, the highest rate since April 2022. Inflation is back to above RBI's tolerance limit of 6%, after staying below the level from March to June 2023.

That is why, the government introduced two major decisions, one being a 40% export duty and the second would be an increase in the quantum of onion buffer to 5 lakh metric tonnes this year. Food and Consumer Affairs Minister Piyush Goyal told reporters that the NCCF and NAFED will buy five lakh tonnes of onions at a historical rate of Rs 2,410 per quintal so that Indian farmers do not suffer from these high prices. Earlier, the onion procurement target was 3 lakh metric tonnes.

On the export duty, Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "When Agri produce prices go up farmers will gain and consumers will lose. The government's role is to strike a balance ensuring remunerative prices to farmers and reasonable prices to consumers. In this context, the decision to impose a 40% duty on the export of onions is justified. It is normal for governments to intervene to hold prices, particularly when elections to many crucial state assemblies are fast approaching."

However, Rahul Bajoria, an economist with Barclays Bank Plc told Bloomberg that the government's move on onions is preemptive, as the price rise appears in line with seasonal trends for now." He added that with expectations of an erratic end to the monsoon season, the government is focusing on the risk of food prices staying elevated in the coming months.

Bloomberg also reported that rising onion prices in India pose a greater risk to Prime Minister Narendra Modi's government than a recent spike of 700 per cent in tomatoes, forcing authorities to take fresh steps to contain food inflation before key polls.

Tomatoes along with onions and potatoes are the three largest produced and consumed vegetables in the country, popularly known as the TOP vegetables. The government received criticism when tomato prices mind-bogglingly climbed by three-fold. Data from the department showed that all-India average monthly wholesale tomato prices stood at Rs 2,457.52 per quintal in June, which rose by a whopping 264.35% to Rs 8953.98 a quintal in July month. In August as well, tomato prices picked up, however, at a slower rate by 7.42% month-on-month to Rs 9,617.99 a quintal as of now. In the past few days, tomato prices have shown signs of easing, however, it will be keenly watched how the prices have fared for the overall August.

However, it is being said that consumers are more sensitive to onions as it is a vegetable which is hard to be replaced with other commodities. Hence, the impact of onion prices is likely to hit harder than tomato prices.

The vegetable inflation rate came in at 37.34% in July 2023, emerging as the biggest contributor to 15-month high CPI inflation followed by spices, pulses & products, and cereals & products which saw an inflation rate of 21.63%, 13.27%, and 13.04% respectively.

However, Vijayakumar earlier said that vegetable price rise is seasonal and will come down soon. But price rises in cereals can last longer since global prices influence domestic prices.

Going ahead, Raghvendra Nath, MD, Ladderup Wealth Management said, "Erratic monsoons over the past months attributed to a steeper-than-expected surge in the prices of vegetables. As seen by the Food and beverage inflation which rose to 10.57% during the month from 4.6% in the previous month. The vegetable prices are expected to stay elevated for quite some time, though fresh market arrivals may help cool down the prices to some extent."