October 30, 2023

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Ashok Gulati writes: How we tame food inflation, and at whose cost

5 min read

Given that a number of state elections are coming up, one can understand the central government’s overdrive to tame food inflation. Obviously, it does not want inflation to be an issue in election campaigns. But how we tame food inflation, and at whose cost, is important to analyse for rational policy making.

The classic case is limiting the exports of basmati rice by putting a minimum export price (MEP) of $1,200/tonne. India has been exporting, on an average, 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.

And if this MEP continues, in all likelihood, India’s basmati exports this year will register a sharp fall.

In many mandis of Punjab-Haryana, traders were shy 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. Externally, it must be remembered that it takes years to develop export markets, and by putting such a high MEP, India is basically handing over our export markets to Pakistan, who is the only other main competitor of basmati rice. Is this a conscious policy decision?

Do our trade policymakers know what damage they are doing to agri-exports? There is a need to revisit and revise this MEP as soon as possible, preferably fixing it at $800 to $850/tonne range. 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. What is needed is a stable export policy and not knee-jerk reactions. 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. The saving grace was the clause in the export policy which mentioned that if some countries write to the Government of India, then it can consider their request on a case-by-case basis. That’s surely not a good way to design an export policy.

Festive offer

Our restrictive export policy has expanded to wheat export bans, an export duty of 40 percent on onions, and so on. With such a restrictive export policy, how can one dream of doubling India’s agri-exports, a target set out by the government. It may be noted that in 2013-14, the last year of the UPA government, India’s agri-exports touched $43.27 billion, up from $8.67 billion in 2004-05 when it took over power at the centre. This is almost a five-fold growth in 10 years. If the same momentum had been maintained during the 10 years of NDA rule, agri-exports should have touched $200 billion. But in reality, they may not touch even $50 billion this year (2023-24).

A major explanation of this failure lies in restrictive exports to favour domestic consumers at the cost of farmers — a typical urban consumer bias, which inflicts a large “implicit tax” on our farmers. That’s surely not the right way to design agri-export policies. Export markets are premium markets and need to be developed and maintained over years.

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If domestic consumers need to be helped, it should be through domestic income policy, targeted towards only the vulnerable sections of society. When poverty is hovering around 15 per cent as per multi-dimensional poverty line of NITI, and when more than 800 million people get free wheat/rice (5kg/person/month), one does not understand the logic of putting an MEP of $1,200/tonne on basmati rice, and handing over years of hard work of Indian rice traders to Pakistan. This is simply perverse.

It must be kept in mind that agriculture exports also reflect how competitive our agriculture is vis-à-vis the rest of the world, and how much surplus it can generate. Competitiveness results primarily from increasing productivity and getting more from less. That, in turn, 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. This is too small. It needs to be immediately doubled, if not tripled, if India is to become a powerhouse of agricultural production as well as agri-exports. But unfortunately, populism, which peaks during election times, 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).

In sum, 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. You cannot get a bang for your buck with such poor design of policies. Our policy makers, in competitive populism mode, feel that they can come back to power through such doles, and sometimes they do succeed. But they do a big damage to the sector’s health and its competitiveness. A nation’s power will be reflected in its capacity to innovate, produce and export to the world at competitive prices. Can India rise to this challenge?

Gulati is Distinguished Professor at ICRIER. View are personal

 

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