taming food inflation: the cost and solution explained by Ashok Gulati
Published on: October 30, 2023.
Filed under:
Central Government’s Efforts to Tame Food Inflation
With several state elections on the horizon, the central government is keen on controlling food inflation to avoid it becoming a contentious issue during election campaigns. However, the methods employed to achieve this and the potential consequences need to be carefully considered for effective policy-making.
The Impact of Export Restrictions on Basmati Rice
A significant example of such measures is the imposition of a minimum export price (MEP) of $1,200/tonne on basmati rice, one of India’s premium rice varieties. Over the past five years, India has exported an average of 4.5 million tonnes annually, primarily to Gulf countries, some European nations, and the US. Punjab and Haryana are the main producers of basmati rice in the country. Typically, the export price falls between $800 and $1,000/tonne. However, the MEP of $1,200 effectively limits basmati exports.
If the current MEP continues, it is highly likely that India’s basmati exports this year will experience a significant decline. In the mandis (wholesale markets) of Punjab and Haryana, traders are hesitant to purchase basmati, leading to lower prices for farmers compared to when exports were unrestricted. Ultimately, the farmers in these states bear the brunt of this policy, while the domestic upper-income urban class reaps the benefits. Additionally, imposing such a high MEP effectively hands over India’s export markets to Pakistan, the country’s main competitor in basmati rice exports. This raises the question of whether this restrictive policy is a deliberate decision.
The Need for Revisiting Export Policies
It is essential for trade policymakers to comprehend the detrimental impact of their decisions on agricultural exports. There is an urgent need to reevaluate and revise the MEP, preferably setting it within the $800 to $850/tonne range. This restrictive export policy is not limited to basmati rice; it also affects broken rice and non-basmati white rice through export bans or duties. What India requires is a stable and well-thought-out export policy, rather than knee-jerk reactions.
India is currently the world’s leading rice exporter, accounting for approximately 40% of global exports in 2022-23. A significant portion of non-basmati rice is exported to numerous African countries. When India announced a ban on exports of non-basmati white rice, these countries expressed concern. Such export policies tarnish India’s image as a leader of the Global South. While there is a clause in the export policy that allows the government to consider requests from certain countries on a case-by-case basis, this is not an ideal approach to designing export policies.
The Impact of Restrictive Export Policies
The restrictive export policy extends beyond rice and affects wheat exports, imposing a 40% export duty on onions, among other commodities. With such limitations in place, how can India realistically aim to double its agricultural exports, which is a government target? In the last year of the previous government’s tenure in 2013-14, India’s agricultural exports reached $43.27 billion, a significant increase from $8.67 billion in 2004-05. This represents nearly a five-fold growth in ten years. If this momentum had been maintained during the ten years of the current government, agricultural exports should have reached $200 billion. However, the reality is that they might not even touch $50 billion this year (2023-24).
A major reason behind this failure lies in the restrictive export policies that prioritize domestic consumers at the expense of farmers, resulting in a significant “implicit tax” on farmers. This consumer bias is not the ideal approach to designing agricultural export policies. Export markets are premium markets that require years of development and maintenance.
Investments in Agriculture R&D and Competitiveness
Agricultural exports reflect the competitiveness of India’s agriculture sector compared to the rest of the world, as well as its potential for generating surplus. Competitiveness hinges on increasing productivity and achieving more with less, necessitating substantial investments in agriculture research and development, high-quality seeds, irrigation, fertilizers, and improved farming practices, including precision agriculture. Currently, India’s overall investment in agriculture research and development, both at the central and state levels combined, is merely around 0.5% of the agricultural GDP—a notably small figure. This percentage needs to be immediately doubled, if not tripled, to position India as a powerhouse of agricultural production and exports.
Suboptimal Spending and Poor Policy Design
Unfortunately, the emphasis on populism during election time, leading to increased subsidies for both consumers and farmers, undermines the competitiveness and health of the agricultural sector. India spends significant amounts of money on agriculture and consumer welfare, including food subsidies of more than Rs 2 lakh crore and fertilizer subsidies of another Rs 2 lakh crore for farmers annually. Additionally, many states announce loan waivers, provide free power, and offer various other forms of assistance. However, the design of these policies hampers their effectiveness and fails to provide the desired results. Effective policies should ensure that each rupee spent generates maximum returns. Policymakers engage in competitive populism, believing that it will help them return to power, but these approaches have a detrimental impact on the sector’s competitiveness.
The Path Towards Agricultural Innovation and Global Competitiveness
The true measure of a nation’s power lies in its ability to innovate, produce, and competitively export goods to the world. India must rise to this challenge by adopting well-designed policies that promote efficiency and competitiveness rather than short-term electoral gains. The agriculture sector requires significant investments in research and development, as well as a stable and adaptive export policy that supports the development and maintenance of export markets. Additionally, prioritizing targeted domestic income policies for vulnerable sections of society would better serve the needs of domestic consumers without hindering agricultural exports. Only then can India harness its potential as a global agricultural powerhouse.
Source: Indian Express
