Date : 1/11/2023

Relevance – GS Paper 3 – Indian Economy

Keywords – Food Inflation, MEP, CFPI, Agri-Exports

Context

As the state elections draw near, the central government is actively working to curb rising food prices. Their goal is to avoid inflation becoming a focal point in election discussions. It is vital to examine the strategies employed by the government to control food inflation and evaluate the effects of these policies.

Current Food Price Trends in India

1. Inflation in Cereals, Pulses, and Vegetables: : Recent estimates indicate a surge in food inflation, primarily driven by cereals (11.9%) and pulses (13%) in July and August. Vegetables experienced even higher retail price rises, reaching 37.4% and 26.1%. Notably, tomatoes faced staggering inflation, with rates soaring to 202.1% and 180.3% during the same period.
2. Disinflation Challenges and Government Strategy: The government, aiming to prioritize consumers, faces challenges due to political considerations favoring numerical strength. However, the need to address producers' concerns is critical. This is particularly true for two essential commodities:
   • Vegetable Oils: Soybean prices have dipped below the government's minimum support price (MSP). Weak demand for both oil and meal is influenced by record-high imports of edible oil, projected to reach 17 million tonnes in 2022-23.
   
   
   • Milk Products: Purchases of milk products like powder, butter, and ghee are limited. Furthermore, the market is impacted by the sale of adulterated ghee, exacerbating challenges for producers, especially post the festival season.
3. Challenges in Wheat and Rice Market:
   (a) Overproduction Issues: Farmers responding to Minimum Support Prices (MSPs) often lead to overproduction of MSP-supported crops like wheat and rice. This surplus floods the market, causing prices to drop below MSP levels.
   
   (b) Procurement and Distribution Challenges: Inefficient procurement infrastructure and distribution systems result in delays and insufficient grain distribution. Inadequate procurement and delayed distribution contribute to market price declines despite oversupply. These trends highlight the complex challenges in balancing consumer interests, producer concerns, and effective market management strategies in the face of India's evolving food price landscape.

Government Imposes Minimum Export Price on Basmati Rice Exports

• Minimum Export Price (MEP) in India restricts exports below a specified threshold, addressing domestic price hikes or production disruptions.
• Recently, in August, the Indian government imposed an MEP of USD 1,200 per tonne on basmati rice exports.
• The decision aimed to prevent unauthorized exports of regular non-basmati rice disguised as premium basmati.
• This move affected the typical export price range of basmati rice, which usually fluctuates between $800 to $1,000 per tonne.
• Basmati rice, a premium variety, is favored by India's affluent population and is exported to Gulf countries, certain European nations, and the US.
• The major basmati rice producers in India are Punjab and Haryana.
• Over the last five years, India has consistently exported an average of about 4.5 million tonnes of basmati rice annually.

Implications of Minimum Export Price (MEP) on Basmati Rice

1. Sharp Decline in Basmati Rice Exports: Continuing with the current MEP may lead to a significant drop in India's basmati rice exports this year.
2. Farmers' Income Reduction: Traders hesitated to buy basmati in Punjab-Haryana markets due to MEP, causing low prices for farmers compared to the open export period. The primary sufferers are farmers from Punjab and Haryana, while the beneficiaries are the affluent urban class domestically.
3. Adverse Impact on Export Markets: India risks losing its export markets to competitors like Pakistan due to the high MEP. Developing export markets takes time, and India's stringent policies might bolster competitors like Pakistan in the global basmati rice market.

Report on India’s Restrictive Export Policies

1. Historical Context: India has historically implemented export control measures during periods of high global prices. Examples include bans on rice exports during the 2007-08 and 2010-11 food price crises, mainly non-basmati rice. The trend continued with restrictions due to global disruptions following Russia's invasion of Ukraine in February 2022, initially imposing a wheat export ban to address domestic inflation and rising world demand.
2. Extensive Coverage: India's restrictive export policies extend beyond basmati rice, covering broken rice, non-basmati white rice, parboiled rice through export bans or duties. Even commodities like onions face a 40 percent export duty, reflecting the broad scope of India's restrictive export measures.

Consequences of India’s Restrictive Export Policies

1. Impact on India's Global Image: India's status as the world's largest rice exporter (40% of global exports in 2022-23) suffers due to bans, especially concerning non-basmati rice, causing concern among African importers. This challenges India's reputation as a leader in the Global South.
2. Hurdles in Doubling Agri-Exports: Restrictive policies hinder the government's goal of doubling agri-exports. Despite a five-fold growth in agri-exports from 2004-05 to 2013-14 ($8.67 billion to $43.27 billion), the sector faces challenges, with 2023-24 estimates falling far short of the expected $200 billion, likely not exceeding $50 billion.

Way Forward

1. Revisiting MEP: Immediate revision of the Minimum Export Price (MEP) is crucial, possibly fixing it in the range of $800 to $850 per tonne, providing relief to farmers and traders.
2. Stable Export Policy Formulation: Policies should be well-considered and predictable, avoiding abrupt changes. Stability fosters an environment where exporters and importers can plan effectively, ensuring informed decision-making.
3. Balancing Urban Consumer Bias: Shifting away from policies favoring urban consumers at the expense of farmers is vital. Addressing domestic consumer needs should be targeted toward vulnerable sections, separating agricultural policy from consumer subsidies.
4. Nurturing Export Markets: Instead of restrictive measures, focus should be on nurturing premium export markets. Developing these markets requires consistent effort over years, emphasizing the importance of a long-term strategy.
5. Boosting Agricultural Competitiveness: Increasing competitiveness demands substantial investments in agriculture R&D, seeds, irrigation, and farming practices like precision agriculture. Doubling or tripling current investments in agriculture R&D is essential to enhance India's agricultural production and exports.
6. Rationalizing Subsidy Culture: Reconsidering populist practices, such as extensive subsidies and doles during election cycles, is necessary. Optimal spending and well-designed policies are crucial to achieving substantial results in agriculture and food security.

Conclusion

• Policy Consideration and Consequences: The government needs to deliberate if export restrictions are deliberate decisions, given the potential repercussions. A thoughtful examination of these policies is crucial, acknowledging the far-reaching effects they might have on various sectors.
• Balancing Inflation Control and Social Impact: While devising policies, the government must strike a balance between curbing inflation and the societal repercussions. It's imperative to assess whose interests are affected and at what cost, ensuring a fair and equitable approach.
• Embracing Economic Competitiveness: A nation's prowess is demonstrated through innovation, production, and competitive global exports. India must rise to the challenge of enhancing its global competitiveness. Prioritizing innovation, efficient production, and competitive pricing will be key in shaping India's global economic standing.

Source – The Indian Express