Economics Commentary- Prices of onions jumped yesterday, buoyed by a ban by India on the export of the item Essay

Prices of onions jumped yesterday, buoyed by a ban by India on the export of the item, traders said. The price of onions rose to Tk 36-45 a kilogram yesterday from Tk 32-42 on Thursday in markets in Dhaka, according to Trading Corporation of Bangladesh. The wholesale prices of onions also rose. â€Å"There is a lack in the supply of onions in the market. Those who are still hoarding stocks are reluctant to sell as well,† said Idris Ahmed, owner of a wholesale store, Dhaka Baniyalaya at Shyambazar. He said onions were selling at Tk 35-36 a kilogram at the wholesale market of Shyambazar yesterday. Prices went up since Friday afternoon, after news of the ban by India, said Ahmed. The prices of locally produced onions also rose, influenced by the move by India, he added. This is the second time in less than a year that India restricted onion exports to curb the hike in prices, according to Indian news reports. On September 8, an Indian ministerial panel banned onion exports following a steep rise in prices, reports Reuters, quoting Food Minister KV Thomas. The restriction came in effect on Friday. â€Å"We will review the ban every fortnight,† said Thomas. Bangladesh meets much of its local demand for onions by importing it from the neighbouring country. Since Saturday, 80 onion-laden trucks entered Bangladesh till yesterday afternoon, our Chapainawabganj correspondent reports. No shipment took place at the Bhomra Land Port yesterday. The trucks carrying onions that came to the Ghojadanga Land Port on the Indian side returned without shipment, our Sathkhira correspondent reports. Babul Hasnat Durul, an onion importer at Sona Masjid, said their suppliers are not shipping onions against the previously placed orders by Bangladeshi importers. â€Å"We are worried. If onions are not exported against the already opened letters of credit (LCs), we will incur losses,† said Durul. The LCs came to a halt following the ban on exports, said Islam of the C& F Agents Association. The disruption in supply from India led to the hike in the prices of locally produced onions, said Mohammad Aminul Islam, an onion wholesaler at Karwan Bazar. He bought a 40 kilogram bag of onions from Pabna on Saturday at Tk 1,450, he said. Prices for the same stood at Tk 1,300-1,350 last week, he added. This article talks about the rise in onion prices that has happened in Bangladesh due to a shortage of onion. The shortage is due to the restriction on onion exports imposed by the Indian government. This has resulted in a decrease in supply (the amount of a commodity that sellers are willing and able to sell at different prices) resulting in price rise. Price of onion in the market is determined by the demand (the amount of a commodity that consumers are willing and able to buy at different prices) for and the supply of onions. Initially the market was equilibrium (this is the point where demand is equal to supply) at point E where at P* price Q* amount was purchased and sold. Due to the ban imposed by the Indian government on exports of onions, the supply of onions in the Bangladesh market has decreased substantially. This is because Bangladesh relies on imports of onions from neighboring countries for the supply in its domestic market The decrease in supply will shift the supply curve to the left from S to S1. This will result in a new equilibrium E1 with a higher equilibrium price. As the article says that the â€Å"price of onion rose to Tk 36-45 a kilogram from Tk 32-42 The higher onion prices will reduce the quantity demanded and people with limited income or low income will have to switch to the available substitutes (goods which satisfy the same wants) like radish. Also industries like restaurants which use onions as inputs will experience an increase in the cost of produced and will be forced to increase price to keep profits constant. The Indian government’s decision to restrict exports of onions will increase the supply of onion in the Indian market. This will result in lower onion prices in India, and hence Indian consumers will benefit. On the other hand onion being a necessary commodity will have an inelastic demand (when for a certain percentage change in price, the quantity demanded will change less than proportionate.) Higher prices in onion will result in a greater expenditure of households and hence Bangladeshi consumers will be the losers. The Bangladeshi farmers and traders who have onion stocks will gain from the higher prices. The Bangladesh government may have to impose a subsidy (payment by government to producers of goods and services either to increase supply or reduced cost) or maximum prices (price imposed below equilibrium price through legislation by the government to protect the interest of consumers) in order to control the onion prices. Provision of subsidy will result in a greater government expenditure which will have an opportunity cost (the next best alternative for government) in terms of various welfare services which need to be sacrificed. Imposition of maximum prices will result in greater shortages and may increase the problem. In order to deal with this situation the government of Bangladesh may resort to import onion from other countries which have surplus. However this is only a short run solution (time period during which at least one factor of production cannot be changed) solution to deal with the immediate prices. Imports will increase supply and thereby reduced price of this commodity and benefit the Bangladeshi households. To deal with this problem in the long run (time period where all factors become variable) the Bangladeshi government should encourage greater domestic production of onion. This can be done by giving subsidy’s to onion producers or spreading awareness to popularise onion production. The government should also try and reduce onion hoarding by traders in Bangladesh market. Hoarding is an illegal activity and the government should be vigilant to stop this. The government also need to improve infrastructure facilities like irrigation, transportation and storage facilities to reduce the fluctuation in the supply of agricultural goods. The government can also build a buffer stock (a stock of essential food grain and strategic materials held by government to deal with unforced seen events) of essential food grains to reduce the fluctuations in the prices of agricultural products like onions. However all this involves a lot of government expenditure which may result in higher government borrowing and greater taxes.