Ashok Gulati and Ritika Juneja write: Why rice and wheat bans aren’t the answer to inflation

News: Earlier, the government banned wheat exports to check the potential rise in prices in the face of low procurement. But now, there are reports that the government is mulling a ban on rice exports to tame inflation.

The wheat and rice exports ban was also done in 2007-08, in the wake of the global financial crisis.

What are the other possible measures that the government of India might also undertake?

There are chances of imposing stocking limits on traders for a host of commodities, suspending futures trading in food items, and there can even be conduct of income tax raids on traders of food.

What are the issues in the export ban?

All these extreme measures in the name of taming inflation only expose the hollowness and lack of understanding within the government about functioning of the market economies and the reason behind high inflation.

Export bans on food items is irresponsible behaviour at the global level. This cam only be resorted in case of major calamity.

Abrupt export bans inflict high costs on poorer nations, and many millions fall below the poverty line as a result of such actions.

The recently concluded WTO ministerial meeting as well as the G-7 meet expressed concerns about food security in vulnerable nations.

Let us take the case of rice first.

India exported 21 million metric tonnes (MMT) of rice in 2021-22 (FY22) in a global market, i.e., about 41% of global exports of about 51.3 MMT. Such large volumes of rice exports brought down global prices of rice by about 23%, when all other cereal prices were going up substantially in global markets.

If India exports more than about 25% of the global trade in rice. It would have a dampening effect on global prices.

What are the suggestions?

India needs to impose for “optimal export tax”, say, a 5-10% tax on rice exports, instead of a ban on rice exports, to recover the large input subsidies that India gives for rice cultivation.

The reasons being:

(1) Such agricultural subsidies create an artificial competitive advantage for Indian rice in global markets.

(2) The government should recover a part of the subsidy like urea, from rice exports by imposing an optimal export tax.

Can imposition of optimal tax will help tame inflation at home?

No. India can’t tame inflation because more than 95% of CPI inflation is due to items, other than wheat and rice. For example, inflation in vegetables contributed 14.4% to CPI inflation, which is more than three times the contribution of rice and wheat combined.

Way Forward

The Agri-trade policies need to be more stable and predictable, rather than a result of knee-jerk reactions.

In perishable commodities like vegetables, India needs to build efficient value chains and link these to processing facilities. So that people can switch processed form of food in case of high prices of vegetables.

India needs to take our food processing industry at priority because India industry is way behind the curve compared to several Southeast Asian nations.

If India wants to be a globally responsible player, it should avoid sudden and abrupt bans.

Source: The post is based on an article “Why rice and wheat bans aren’t the answer to inflation” published in the Indian Express on 4^th July 2022.