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

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Reports suggest that the government is considering banning rice exports to control inflation. Earlier, on May 13, the government banned wheat exports to curb potential price increases amid weak purchases. This is certainly not the first time that we have tried to ban wheat and rice exports. This was also done in 2007-2008, in the wake of the global financial crisis. By doing it again, some in the government think they can get India’s inflation under control. Perhaps they will also impose storage limits on traders for a host of commodities, suspend food futures trading, and even conduct tax raids on food traders. But all of these extreme measures in the name of controlling inflation only expose the void and lack of understanding within government about how market economies work and what really lies behind high inflation.

Let us first take the case of rice. India exported the highest volume ever of 21 million metric tons (MMT) of rice in 2021-22 (FY22) in a global market of around 51.3 MMT, accounting for around 41% of world exports. In a previous article in this column (‘The cost of the carbon footprint‘, IE, May 23), we had argued that such large volumes of rice exports caused world rice prices to fall by around 23% in March (Annual), while all other grain prices, whether wheat or maize, increased significantly on world markets by 44 and 27% respectively. Our rough calculations suggest that if India exports more than about 25% of world rice trade, it starts to have a moderating effect on world prices. In fact, in FY22, the unit value of common rice exports was only $354/ton, which was below the minimum support price (MSP) for rice. This meant that rice exporters bought rice (paddy) from farmers and millers at a price below the MSP or that a sizable portion of the rice given free under Prime Minister Garib Kalyan Ann Yojana (PMGKAY) was siphoned off for be exported at lower prices. MSP.

When ‘excess exports’ drive down world prices, it means that to earn the same dollar, India will have to export more rice. This is a perfect case for an “optimal export tax” – not a ban – on rice exports. We would argue here for the imposition of, say, a 5-10% tax on rice exports to recoup the large input subsidies that India also provides for rice cultivation. Free electricity for irrigation in several states, including Punjab, and heavily subsidized fertilizers, especially urea, create an artificial competitive advantage for Indian rice in world markets. While urea prices in world markets exceeded $900/tonne in April, Indian farmers are paying around $72/tonne at prevailing exchange rates, which is perhaps the cheapest price a farmer pays in the world. And government subsidy on fertilizer will surely exceed Rs 2 lakh crore in FY23. subsidizing urea on rice exports by imposing an optimal export tax.

But will this help to control inflation at home? The answer is no. To understand this, you have to look at the contribution of the various items to inflation. In May, consumer price index (CPI) inflation was 7.04% (year-on-year). The cereals group as a whole contributed only 6.6 percent to this inflation. In this framework, wheat, other than through the PDS, only contributed 3.11% and non-PDS rice 1.59%. Thus, by imposing a ban on wheat and rice exports, India cannot control its inflation because more than 95% of CPI inflation is due to other factors. Interestingly, vegetable inflation contributed 14.4% to CPI inflation, more than three times the contribution of rice and wheat combined. And in vegetables, tomatoes alone contributed 7.01%. Will the government now ban tomato exports?

All this indicates that agro-trade policies need to be more stable and predictable, rather than the result of knee-jerk reactions. For products like vegetables, most of which are largely perishable, we need to build efficient value chains and link them to processing facilities. Thus, when the prices of fresh vegetables increase, as for the tomato in May, people can switch to its processed form (tomato puree), whose prices are more stable. The same would go for onions, which often make kitchen budgets cry when prices soar. A switch to dehydrated onion flakes and onion powder would be the answer. Our food processing industry, especially in perishables, is far behind the curve compared to several Southeast Asian countries. This must be taken as a priority.

Food export bans also show somewhat irresponsible behavior globally, unless there is a major calamity in the country concerned. India is in a privileged situation because, for food, it is largely self-sufficient, except in the case of edible oils where it imports 55 to 60% of its consumption. Think how India felt when Indonesia banned its palm oil exports?

The just-concluded WTO Ministerial meeting and the G-7 meeting have expressed concerns about food security in vulnerable countries. Savage export bans inflict high costs on the poorest nations, and many millions of people fall below the poverty line as a result of such actions of the few. If India is to be a globally responsible player, it must avoid sudden and harsh bans and, if necessary, filter them through transparent export taxes to recoup its large electricity and fertilizer subsidies.

(Gulati is a professor holding the Infosys chair for agriculture and Juneja is a researcher at ICRIER)

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