Global onion prices could be set to rise with India slapping an export tax on domestic production

With India slapping a 40% export tax on onions on the back of higher domestic prices of the vegetable, analysts are considering the global impact, especially on major importers.

The new levy announced Saturday acts to ensure domestic availability and cool inflation, and is effective immediately until December 31, according to the country's Ministry of Finance.

Retail prices of onions in India have risen around 20% year-on-year, averaging at around 30.72 Indian rupees (37 cents) per kilogram on Aug. 19, compared to 20.44 rupees in the same period last year, data from India's Department of Consumer Affairs shows.

"High rainfall in the month of July 2023 in key producing regions of Maharashtra and Karnataka led to damage to the stored onion crops," said Pushan Sharma, director of research at CRISIL Market Intelligence and Analytics, an Indian research firm which is a subsidiary of S&P Global.

According to the Indian Meteorological Department, several parts of India were battered by rainfall during July.

Meanwhile, India's inflation numbers for July hit a 15-month high of 7.44% compared to a year ago, largely attributed to the spike in domestic food costs. In April, prices of onions had dropped 32.2% year-on-year on the back of oversupply as a result of early crop maturation, according to a Mintec report published April.

But now the South Asian nation is currently wrestling with high vegetable, fruit and grain prices. Prices of tomatoes in India previously surged more than 300% due to adverse weather. India's government in July also banned the exports of non-basmati white rice in a bid to ensure sufficient domestic supplies.

"The government would like to rein [in] prices and ensure sufficient availability in the domestic market. The late onset of monsoon has also affected the current onion crop," said Samarendu Mohanty, Asian regional director of agricultural firm International Potato Center (CIP).

Bangladesh, Malaysia, Sri Lanka and parts of the Middle East rely on India for onion and the taxes will raise the prices of onions for these countries, he told CNBC.

India is the world's largest exporter of onions, and contributes over 12% of global onion trade, data provided by CRISIL showed.

"Global onion prices are likely to get a positive price cue on account of India's decision," Sharma said.

However, he noted that the price hike is expected to be short lived, until October, where more onion crops are expected to come into the market.

Onions are an integral staple in India, and used in traditional South Asian dishes such as biryani. Alongside tomatoes and potatoes, the three vegetables form a part of the nation's CPI basket. In 2019, India banned the exports of onions after a reduced harvest due to excessive rainfall.