How We Tame Food Inflation, And at Whose Cost

Why in News?

• With state elections approaching, the central government is making significant efforts to control food price increases.
• While the government aims to prevent inflation from becoming an issue in election campaigns, it is crucial to analyse the methods used to control food inflation and assess the impact of policies. 

The Government’s Decision to Put an MEP on the Export of Basmati Rice

• Minimum Export Price (MEP)is the price below which an exporter is not allowed to export the commodity from India.
  • It is a kind of quantitative restriction to trade imposed in view of the rising domestic retail / wholesale price or production disruptions in the country.
• In August, the government decided to prohibit the export of basmati rice at a price lower than USD 1,200 per tonne.
  • The government argued that the decision was to prevent potential unauthorized exports of regular white non-basmati rice disguised as premium basmati rice.
• On an average, India has been exporting about 4.5 million tonnes (MT) a year over the last five years or so.
• This is a premium rice consumed by the upper middle class and the rich in India, and is exported to Gulf countries, some European countries and also the US. Punjab and Haryana are the primary producers.
• The export price normally hovers between $800 to $1,000/tonne. By putting an MEP of $1,200, practically, much of the basmati export is restricted.

Possible Implications of Putting a MEP on Exports

• Sharp Fall in Exports of Basmati Rice: If this MEP continues India’s basmati exports this year will register a sharp fall.
• Farmers’ Income Loss
  • In many mandis of Punjab-Haryana, traders were reluctant in buying basmati and as a result, prices for farmers have been low compared to what they were when exports were fully open.
  • So, the losers are ultimately the farmers of Punjab and Haryana, while the gainers would be the domestic upper income urban class.
• Adverse Effect on Export Markets: It takes years to develop export markets, and by putting such a high MEP, India is basically handing over its export markets to Pakistan, who is the only other main competitor of basmati rice.

A Report on India’s Restrictive Export Policy Decisions

• A report shows that India has often imposed export control measures during periods of high global prices.
• During the 2007-08 and 2010-11 food price crises India banned export of rice, mostly non-basmati rice, for extended periods.
• With global markets disrupted by Russia’s invasion of Ukraine starting in February 2022, India initially imposed a wheat export ban, fearing domestic inflation and rising import demand from the rest of the world.
• The restrictive export policies are not just limited to basmati rice. They cover even broken rice, non-basmati white rice, parboiled rice, either through complete export bans or export duties.
• India’s restrictive export policy has expanded to an export duty of 40 percent on onions, and so on.

Consequences of India’s Restrictive Export Policies

• Can Adversely Affect India’s Reputation
  • It is well known that India is the largest exporter of rice in the world accounting for about 40 per cent global exports in 2022-23.
  • Much of the non-basmati rice goes to several African countries, who pressed the panic button when India announced ban on exports of non-basmati white rice.
• That does not give India a good image of a leader of the Global South.
• Will Make it Difficult to Double Agri-Exports
• With such a restrictive export policy, the task of doubling India’s agri-exports - a target set out by the government, cannot be achieved.
• In 2013-14, India’s agri-exports touched $43.27 billion, up from $8.67 billion in 2004-05. This is almost a five-fold growth in 10 years.
• If the same momentum had been maintained during last 10 years, agri-exports should have touched $200 billion. But it may not touch even $50 billion this year (2023-24).

Way Forward

• Need to Revisit the MEP: For immediate relief to farmers and traders, there is a need to revisit and revise this MEP as soon as possible, preferably fixing it at $800 to $850/tonne range.
• Formulation of a Stable Export Policy
  • Changes in export policies should not be abrupt or reactive but instead should be well-thought-out and predictable.
  • Stable policies create an environment in which both exporters and importers can make informed decisions and plan their actions accordingly.
  • The government should understand the importance of a stable export policy and not rely on knee-jerk reactions to manage country's exports.
• Government Should Move on From Urban Consumer Bias
  • The major explanation of restriction of exports is to benefit domestic consumers but at the expense of farmers.
  • This approach exhibits a clear bias toward urban consumers and imposes a substantial hidden burden on farmers.
  • Such a strategy is undoubtedly not the ideal approach to crafting agricultural export policies.
  • If domestic consumers need to be helped, it should be through domestic income policy, targeted towards only the vulnerable sections of society.
• Nurture Export Markets Rather than Employing Restrictive Export Policies
  • Restrictive exports policies do not appear to be a conscious decision and by formulating these restrictive policies India’s trade policymakers do not know what damage they are doing to agri-exports.
  • Export markets are premium markets and need to be developed and maintained over years.
• Boost Investment to Make India’s Agri-Sector Competitive
  • Agriculture exports also reflect how competitive India’s agriculture as compared to the rest of the world, and how much surplus it can generate.
  • Competitiveness results primarily from increasing productivity and getting more from less.
  • It requires massive investments in agriculture R&D, seeds, irrigation, fertilisers, better farming practices including precision agriculture.
  • India’s overall investment in agriculture R&D, both of the Centre and of states together, hovers around 0.5 per cent of the agri-GDP.
  • It needs to be immediately doubled, if not tripled, if India is to become a powerhouse of agricultural production as well as agri-exports.
• Put a Halt on Revdi Culture (Doles)
  • Populism peaks during election times that leads to more subsidies, be it a food subsidy of more than Rs 2 lakh crore for consumers or a fertiliser subsidy of another Rs 2 lakh crore for farmers.
  • On top of this, many states announce loan waivers, free power, and many other “revdis” (doles).
  • There is no dearth of money being spent on agriculture or consumers to have food security.
  • But the manner in which that money is spent is suboptimal. Achieving significant results with such poorly designed policies is quite challenging.

Conclusion

• The government must start thinking whether this policy decision to restrict exports is a conscious one since the policy could have significant consequences.
• The government must keep in mind how to tame inflation and at whose cost, while formulating polices.
• A nation’s power will be reflected in its capacity to innovate, produce, and export to the world at competitive prices and India must rise to this challenge.

Q1) What is a restrictive export policy?

Restrictive export policies refer to government-imposed regulations and controls that limit or prohibit the export of certain goods, technologies, or services from a country. These policies are typically implemented for various reasons, including national security, foreign policy objectives, economic considerations, and compliance with international agreements. The specific restrictions can vary from one country to another. 

Q2) What is food security?

Food security is defined when all people, at all times, have physical and economic access to sufficient safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life.

Source: The Indian Express