New Delhi: India’s attempts to curb food inflation by banning the export of wheat and non-Basmati white rice not only failed in keeping prices down, but also cost farmers more than Rs 40,000 crore, created panic among India’s trading partners, and also went against the G20 spirit of ensuring food security, a new research paper has said.
The paper, authored by Ashok Gulati, Raya Das, Sanchit Gupta, and Manish Kumar Prasad— all researchers at the Indian Council for Research on International Economic Relations (ICRIER) — and published Thursday, also proposed several alternate solutions to the high food inflation issue, including greater transparency on the part of the government.
The issue of food prices remains an important one for India, with food inflation, as measured by the Consumer Price Index (CPI), coming in at 9.2 percent in August 2023, according to government data released Tuesday. Inflation in cereals came in at 11.8 percent.
The ICRIER paper noted that the government has taken several measures so far to contain inflation, including the imposition of a wheat export ban in May 2022, a ban on the export of broken rice in September 2022, the implementation of stocking limits on wheat traders and millers in June 2023. The government also imposed an export ban on non-basmati white rice in July 2023, an export duty of 20 percent on par-boiled rice, and a 40 percent export duty levied on onions in August 2023.
“These measures, stringent and somewhat abrupt, indicate a knee-jerk approach rather than a well-thought out strategy,” the paper argued.
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Steps to curb inflation
The paper did note that inflation in wheat retail prices eased to 9.33 percent in August from 11.94 percent in July 2023.
However, it added that the lower procurement of 26.1 million metric tonnes (MMT) by the government — “way below” the target of 34 MMT in the current Rabi marketing season — has created concern about the supply of wheat in the coming months.
This has compounded an issue over the last two years where heat waves have led to a marked discrepancy between trade estimates of actual production and the government’s official estimates. This discrepancy, the authors argued, has led to a “trust gap” in the market, which places stress on wheat prices.
“Panicked by the lower figure of procurement, GOI (Government of India) suddenly banned wheat exports in May 2022, even though inflation was below 10 percent (9.45 percent) in May 2022,” the paper explained.
“But this sudden ban on wheat exports, instead of bringing wheat inflation down, led to greater uncertainty in the market, and wheat inflation surged to 15.7 percent in August 2022, when GOI also banned exports of wheat flour (atta) products,” it added.
The paper went on to say that the export bans failed in their ultimate goal of containing wheat inflation, which shot up to 25.4 percent by February 2023, just before the harvest season.
The authors explained that, as a “last-ditch measure”, the government began selling wheat in the open market from February 2023 through the Open Market Sale Scheme (OMSS).
According to the paper, a total of 3.4 MMT of wheat was sold at prices well below the Minimum Support Price (MSP) at which the Food Corporation of India (FCI) has to buy wheat from the farmers.
Further, the government in June 2023 — for the first time in 15 years, according to the paper — imposed wheat-stocking limits to control wheat price inflation.
Help consumers, hurt farmers
The authors acknowledged that these stringent measures did succeed in reining in price inflation for wheat — which fell by nearly a third between February and August 2023 — but also raised the issue of what impact these measures had on India’s farmers “who bore the brunt of this stringent approach”.
“The adoption of such policy measures indicates a bias in favour of urban consumers in India’s food price policy, which in turn is a disguised transfer of resources from farmers to consumers,” the paper said.
The authors argued that the combination of an export ban and the government selling wheat in the open market at prices below the MSP guaranteed to farmers amounts to “dumping” within India by the government itself. Dumping refers to the practice where something is sold well below the prevailing market price.
“Without this market intervention, farmers could have potentially earned an additional Rs 548 per quintal from their sales of wheat,” the authors said.
“Our rough estimate of the collective loss incurred by farmers due to the sale of wheat at reduced OMSS (Open Market Sale Scheme) prices, is a staggering Rs 45,283 crore (since February 2023).”
“This brings out the economic impact of the government’s restrictive policies on farmers,” they added.
‘Knee-jerk steps on rice’
The authors said that the government’s rice export bans in September 2022 and July 2023 hurt India’s trade partners, several of which were heavily dependent on Indian rice for their food security.
They said that, rather than initially imposing an export duty on rice, and then gradually increasing it, the government suddenly banned the export of non-basmati rice (in July 2023), which created panic not only in many African importing countries, but also among the Indian diaspora in the US.
“This is not in line with the spirit of G20 proposals to ensure global food security, as it has hit the African countries most, which account for a substantial (53.89 percent) share of non-basmati exports from India,” the paper said.
It added that, due to India’s rice export ban, global Indica (par-boiled) rice price, according to the Food and Agriculture Organisation of the United Nations, jumped to its highest level in the last 15 years, with a 40.31 percent increase in August 2023 compared with August last year.
“In spite of the export ban, retail inflation rate in August 2023 Consumer Price Index for rice remained at 12.54 percent (year-on-year), indicating the limited effectiveness of the restrictive policies chosen to tame inflation,” the paper said.
How to fix the problem?
The authors argued that the government should calibrate its trade policy carefully to reduce food inflation, as it had successfully done with edible oils over the course of 2021-22.
“To cool down the prices and to control the panic of shortages in the market, import duty for wheat should be reduced to say 5 percent from current 40 percent and the government can import 5-6 MMT of wheat,” the authors suggested.
However, they added that the import price should ideally not be lower than the MSP to ensure that farmers at least get that minimum price.
Further, the authors said that the government should build buffer stocks for volatile vegetables such as tomatoes, onions, and potatoes (TOP) during the harvest season, which would help farmers get stable prices for their produce during periods of glut.
“The stocks can be systematically released over the lean period, or during festive season, when demand is high, to cool down the prices,” they said.
“As it has for pulses, GOI can procure a buffer stock of 5-10 percent of production of TOP to be used for stabilising prices,” they added.
Finally, in the short term, they said that the government should refrain from selling produce in the open market at prices lower than the MSP, as this can disincentivise farmers and traders to invest in storage.
“To facilitate this, an expansion of cold storage infrastructure is important, and the use of solar energy for perishable storage is a cost-effective and energy-efficient way to go about it,” they said.
They also suggested several medium and long-term suggestions, such as facilitating farmer producer organisations, investing in research and development, and increasing the area covered by irrigation.
(Edited by Richa Mishra)
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