Asia Economy

India bans onion exports after monsoon rains damage crops and prices soar

Key Points
  • India banned the exports of onions after excessive rainfall damaged crops and reduced harvest, which sent prices soaring domestically.
  • Onions are widely consumed in India because it's a common ingredient in local cuisine.
  • India is one of the top exporters of onions globally, selling 2.2 billion kilograms — worth around $514.3 million — of fresh and chilled version of the vegetable overseas during the 2018 calendar year, according to official trade data.
A vegetable vendor selling onions by the road in Noida, India.
Virendra Singh Gosain | Hindustan Times | Getty Images

India banned the export of onions after excessive rainfall damaged crops and reduced harvest, which sent prices soaring at a time when slowing consumer demand has dragged down growth in Asia's third-largest economy.

The ban took effect on Sunday and will last "till further orders," according to a government notice. Several media reports said prices of onions — a common ingredient in Indian cooking — have doubled since July.

India is one of the top exporters of onions globally. During the 2018 calendar year, the country sold 2.2 billion kilograms — worth around $514.3 million — of fresh and chilled onions overseas, according to official trade data. But onion exports accounted for just 0.16% of the country's overall exports last year, the data showed.

Still, the export ban is not the only move that Indian authorities have taken to tame soaring prices given the importance of the vegetable to domestic consumers.

The government has tried to bring down domestic prices by releasing supplies from its national buffer stocks. It also set a minimum export price on onion shipments earlier in September at a level it had hoped would discourage foreign buyers. The government also withdrew an export incentive in June.

India's slowing economy

India has been pummeled by its heaviest monsoon rains in 25 years. The monsoon season, which typically lasts from June to September, flooded several states and submerged farms.

The monsoon season is an important period as it can boost output for India's agriculture sector, which consultancy IHS Markit said accounts for around 14% of the country's $2.7 trillion economy and 42% of total employment.

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Reduced farm output during the monsoon months also affects other industries in India, such as manufacturing and retail— which potentially could derail the momentum of an economy that's already slowing down. In the April-to-June quarter, India's economy grew 5% year-on-year — its weakest pace in six years as consumer demand and government spending slowed.

That weakness in economic growth is part of the reason why many analysts are expecting the Indian central bank to cut interest rates two more times this year, even though the government has already cut corporate tax rates in an attempt to revive the economy.

"We don't think the RBI (Reserve Bank of India) is done with easing either, especially with Governor Shaktikanta Das recently hinting at more easing, which leaves little doubt about the RBI slashing rates again next week. The key question is whether it will be yet another bigger-than-usual cut?" ING economists wrote in a note last week.

The Indian central bank has lowered its benchmark rate by a total of 1.1 percentage points since January — more than many of its regional peers.

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Key Points
  • India's agriculture sector accounts for around 14% of the country's $2.7 trillion economy and 42% of total employment, said Rajiv Biswas, chief economist in Asia Pacific for consultancy IHS Markit.
  • With around 55% of India's arable land dependent on precipitation, the amount of rainfall during the current monsoon season could sway economic activity in the agriculture sector and industries linked to it.
  • That slow start to the monsoon harvest season has prompted the government to raise minimum support prices for all of the current season's crops to help support farmers' incomes, according to local media.