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What Do Onions and the Panama Canal Have in Common? 🧅

Last week India imposed a 40% export tax on onions, and plans to sell them locally at a subsidised rate.

Now that the price for tomatoes is declining, there has been a steady rise in the price of onions.

India is particularly sensitive towards the price of onions, potatoes and tomatoes, since they are crucial to the Indian palette.

The government’s onion tax looks pre-emptive since the rise of prices is in line with seasonal trends.

However, the recent 8x rise in tomato prices seems to have brought criticism for the government, along with contributing to retail inflation, which reached a 15 month high in July 2023.

High inflation has also added to anxiety around sustenance of the current status quo on interest rates that the RBI has stuck to. Any rate increase would have us going back to the same cycle of slower growth, lower valuations, and pressured markets; which at least India seemed to have sustainably contained until the recent price increases popped up.

Similar anxiety has been popping up in the US too, with treasury yields soaring.

The fact that the US economy is strong with buoyant growth, unemployment at its historic lows, and high wage growth has resulted in investors worrying that the Feds work of cooling the economy down is far from over.

Other than that, there are supply pressures which are also adding to inflation worries. Over 200 cargo ships are stuck at the Panama Canal (the place that connects the Atlantic and Pacific oceans), nearly a third of the Pacific’s containers pass through.

A drought made local authorities restrict the number of ships that can pass through per day since the movement of ships requires freshwater.

The delay is already causing a rise in shipping prices, and can also contribute to inflation in the US, which has been a worry for months now. And higher inflation would lead us back to the same place that is already pressuring the markets - rate hikes!

But unlike in India where government intervention can lead to contained onion prices, there’s little the US can do to free up the Panama Canal.

Again, India seems to be better placed with ammunition available to tackle potential pain.

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