It's entirely true that the humble onion is an important part of many of the various Indian cuisines. But it's still entirely bizarre to see a government of 1.25 billion people attempting to regulate both the price of and trade in such a basic agricultural good. Especially as the manner by which they intervene is so obviously less efficient than simply letting the free market rip. For what they're doing, all they're doing, is imposing a number of extra bureaucratic steps into that market, and markets work best in the absence of that sort of thing.
Now, yes, onions are an important foodstuff so perhaps we really might want the government of India to keep an eye on the supply and price. But this just isn't the way to do it:
Government on Friday increased sharply the minimum export price (MEP) of onion by USD 175 per tonne to USD 425 per tonne to ensure adequate domestic supply and contain price rise.
The wholesale price of onion have risen to Rs.16-17 per Kg from Rs.11 per kg in last one month at Lasalgaon in Maharashtra, Asia’s biggest onion market.
“Export of all varieties of onions will be subject to a MEP of USD 425 FOB (freight on board) per tonne,” directorate general of foreign trade (DGFT) said in a notification. The new MEP - rates below which no exports are allowed - will be applicable with immediate effect. The government imposes MEP to restrict outbound shipments and check price rise in the domestic market.
If onion prices in India rise above the world level then no one will want to export them anyway: why would you do that in order to make a loss? And if the onion price in India is above the world market price then people will import them in order to make a profit by doing so:
The government is considering importing onions to boost domestic availability of the commodity and prevent spike in its prices.
Retail prices of onion have already risen by up to 40 per cent in metro cities in the last one year.
The maximum increase in prices is seen in Delhi, where onion costs Rs. 34/kg at present, as against Rs. 24/kg in a year ago during the same period, as per data maintained by the Consumer Affairs Ministry.
The absurdity is to have the government deciding upon either import or export at any one time. And it's at a senior level of government too:
“The issue was discussed in a meeting of the Committee of Secretaries last week. It recommended the Commerce Ministry to look at the possibility of imports to boost supplies in the market and keep a lid on prices,” sources said.
The solution to this is simple and pure free trade in onions. Then the domestic price of onions will be the world price, plus or minus transport costs dependent upon which way the traffic is going. This is straight David Ricardo and he published in 1817 so it is really time that governments got up to speed on this.
Now it is possible to make all sorts of points about domestic security of supply and so on in something that's a basic foodstuff. Not that I would accept such arguments but look at what is happening here. The government doesn't accept those arguments either. It's quite happy for there to be foreign trade, either way. Either exports of onions or imports of onions are just fine by said government. But only if that government stamps its bureaucratic imprimatur on which way the flow is going.
And, let's be honest about this, who do you think is going to have a better idea about what onion prices and demand are? People who buy and sell onions all day every day for their living? Or the bureaucrats who get their information second and third hand after something of a delay?
We've even got an example of this:
Prices in both wholesale and retail markets have started increasing due to sluggish supply of good quality onions in the wake of the crop being damaged in storage in major growing states, including Maharashtra, a Nasik-based trader said.
Much of the Rabi onion crop is stored to meet the demand in lean period. But this year, most of the onion kept in storage is of poor quality as the Rabi crop got damaged due to unseasonal rains in early March in Maharashtra and Gujarat, the trader said.
So, when did traders know that the Rabi crop was damaged? We can be absolutely certain it was before the bureaucrats did because who is going to tell the bureaucrats other than the traders? Quite. So, a free market in onions would have begun importing more onions the moment that crop damage was known. The licensure system for imports has meant delay while the issuance of the relevant permissions was debated. The same is true of the export price rise: that was also imposed some time after that damage to the Rabi crop was known to the market.
There are indeed arguments about not having trade in certain goods: I'm fine with them being imposed on nuclear goods for example. But once you have decided to have trade it's blindingly obvious that you want to have free trade. Simply on the grounds that any bureaucracy is going to react to either surplus or shortage much more slowly than any group of profit seeking middlemen. Thus India should have free trade in onions.
