Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

Why rice and wheat bans aren’t the answer to inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Issues with export ban

Context

There are reports suggesting that the government is mulling a ban on rice exports to tame inflation.

Background

  • This is surely not the first time an attempt is being made to ban wheat and rice exports.
  • It was also done in 2007-08, in the wake of the global financial crisis.
  • Perhaps government will also impose stocking limits on traders for a host of commodities, suspend futures trading in food items, and even conduct income tax raids on traders of food.

Issues in India’s rice export strategy

  • Highest ever volume: India exported the highest-ever volume of 21 million metric tonnes (MMT) of rice in 2021-22 (FY22) in a global market of about 51.3 MMT, which amounts to about 41 per cent of global exports.
  • Reduces price: Such large volumes of rice exports brought down global prices of rice by about 23 per cent in March (YoY), when all other cereal prices, be it wheat or maize, were going up substantially in global markets.
  • In fact, in FY22, the unit value of exports of common rice was just $354/tonne, which was lower than the minimum support price (MSP) of rice.
  • Below MSP buying or leakage from PMGKAY: This meant that rice exporters were either buying rice (paddy) from farmers and millers at below the MSP or that quite a substantial part of rice was given free under the PM Garib Kalyan Ann Yojana (PMGKAY) was being siphoned away for exports at prices below MSP.
  • Artificial competitive advantage: Free electricity for irrigation in several states, most notably Punjab, and highly subsidised fertilisers, especially urea, create an artificial competitive advantage for Indian rice in global markets.
  • Suggestion: This is a perfect case for “optimal export tax” — not a ban — on rice exports.
  • If we can’t raise the domestic price of urea, which is long overdue, we should at least recover a part of the urea subsidy from rice exports by imposing an optimal export tax.

Why export ban on wheat and rice is not a solution

  • Small contribution of cereals in inflation: In May, the consumer price index (CPI) inflation was 7.04 per cent (YoY). The cereals group as a whole contributed only 6.6 per cent to this inflation.
  • Within that, wheat, other than through PDS, contributed just 3.11 per cent and non-PDS rice contributed 1.59 per cent.
  • So, by imposing a ban on wheat and rice exports, India can’t tame its inflation as more than 95 per cent of CPI inflation is due to other items.
  • Interestingly, inflation in vegetables contributed 14.4 per cent to CPI inflation, which is more than three times the contribution of rice and wheat combined. And within vegetables, tomatoes alone contributed 7.01 per cent.
  • What all this indicates is that agri-trade policies need to be more stable and predictable, rather than a result of knee-jerk reactions.
  • Irresponsible behaviour: Export bans on food items also show somewhat irresponsible behaviour at the global level, unless there is some major calamity in the country concerned.
  • The recently concluded WTO ministerial meeting as well as the G-7 meet expressed concerns about food security in vulnerable nations.

Way forward

  • Efficient value chain and processing facilities: In commodities like vegetables, most of which are largely perishable, we need to build efficient value chains and link these to processing facilities.
  • The same would go for onions, which often bring tears to kitchen budgets when prices shoot up.
  • A switch to dehydrated onion flakes and onion powder would be the answer.
  • Our food processing industry, especially in perishable products, is way behind the curve compared to several Southeast Asian nations.

Conclusion

If India wants to be a globally responsible player, it should avoid sudden and abrupt bans and, if need be, filter them through transparent export taxes to recover its large subsidies on power and fertilisers.

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