Frequent policy flip-flops are bad for farmers as well as consumers

Context: In a sudden move, the central government banned the export of wheat on 13th May, a day after retail inflation numbers for April were released.

It was wheat inflation at 9.6% that triggered this panic reaction.

None of it was unexpected, given the trend so far. The Food and Agriculture Organisation food index has been at its highest since the series began, driven by inflation in edible oil and cereals. Wheat prices have been rising since November and gained pace after the Russia-Ukraine war.

How did India go from making claims of ensuring global food security to worrying about its own in just a month?

The reason appears to be a lack of understanding of the agrarian economy or its food security impact.

What factors did the Govt failed to consider?

It was known that wheat production would suffer due to extreme heat waves, which damaged standing crops. While the government revised its production estimate down by only 5.7% to 105 million tonnes, actual output may be even lower.

Russia-Ukraine war: That wheat prices were rising internationally was also known months in advance. With the Russia-Ukraine war, there was a clear indication that global markets would witness a 25-30% fall in supply, given the dominant share of these two countries in the global wheat trade. This information was available and used by traders to pay higher prices to farmers for grains. It was obvious even to the government, given the low arrival of grains at public procurement centres. As against our target of 44 million tonnes, actual procurement has been less than 20 million tonnes.

What steps could have been taken?

Relaxing the quality of wheat procurement will help, but is too little, too late.

A bonus over the minimum support price. This would not only have allowed the government to meet its procurement target on time, but also provided better prices to farmers. Instead, the government allowed private traders and speculators to take advantage of the situation and mop up supplies from the market. These were mostly bought for exports, but are now trapped by the ban.

How domestic food security is being impacted by shortage of wheat?

There’s been a cut-back in the NFSA allocation of wheat in several states, many of them mainly wheat-consuming states.

The entire allocation under the PMGKAY for major wheat-consuming states Bihar and Uttar Pradesh has been withdrawn. The offer to replace these with rice shows a confused bureaucratic approach that assumes people can change their dietary preferences and tastes according to government fiat.

What is the overall negative impact of the policy uncertainty?

First, the Govt created a hype of a bumper crop and made claims that India had the ability to feed the entire world and the only reason it was not able to do so currently was due to WTO’s rules.

Just a day before the export ban, India announced sending trade delegations to nine countries, including Morocco, Tunisia, Indonesia and Thailand, to explore opportunities for exporting wheat.

Then after all this hype, Govt put an export ban on wheat.

Such sudden decisions and overall policy uncertainty can have the following negative impacts:

– uncertainty over government policies.

– Apart from sending mixed signals to farmers and traders, it also reflects a lack of understanding of the domestic food and agricultural economy. At a time when inflation is likely to erode real purchasing power, especially in rural areas and of the poor, the withdrawal of NFSA and PMGKAY wheat allocations will worsen lives.

– But a far worse outcome would be a loss of faith in public policy.

Source: This post is based on the article “Frequent policy flip-flops are bad for farmers as well as consumers” published in Livemint on 19th May 22.