Imposing restrictions on exports, stocking limits not the optimal policy to tackle food inflation: ICRIER

This was followed by uneven rainfall which continued to affect Kharif crops adversely. August brought more bad news. As per the IMD, this was the driest August in the last 122 years. September is recording some rainfall, but the experts say that as the maturing window for key crops like soybean, cotton, maize, groundnuts, coriander, coffee and pulses is over, this rainfall won't help much.

At the same time, excessive rainfall damages paddy crops and is likely to impact the yield and overall production.

The government of India started reacting to these situations. The action included a ban on wheat exports in May 2022, a ban on the export of broken rice in Sep 2022, a ban on exports of wheat flour products, a ban on non-basmati rice exports, imposing stocking limit on wheat traders and millers in June 2023 and the recent 40 percent export duty on onions.

CNBC-TV18 has been reporting how these decisions are impacting farmers across the country. These bans agonised farmers. They claimed that these bans were hampering the limited opportunities available to them to make some profits. The farmers claim that these bans coming in place at a time when they are already facing the wrath of the climatic factors, is a double whammy.

Indian Council for Research on International Economic Relations, in its latest paper, has explored the impact and side effects of these export bans and stocking limits policies as tools to tackle food inflation.

The ICRIER paper states that "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 mentions that 'In financial year FY22, India exported 7.5 MMT of wheat, and with Russia-Ukraine war from March 2022 onwards, the global prices were in an upswing. India could have exported even more, which would have benefitted farmers as domestic prices were rising in tandem with the global trend.

But by banning exports of wheat and wheat products (atta), unloading 3.4 MMT of wheat under open market operations at prices below economic cost, and then putting stocking limits on traders and millers, the market prices were dragged down to the level of the MSP announced.'

The paper says that this export ban and stocking limit imposition approach of the govt reflects a strong pro-consumer bias. It says, 'the purpose of Minimum Support Price (MSP) policy is to serve as a floor price for farmers. If market prices are higher, GOI is supposed to compete in the market and procure at market prices for its needs to feed the PDS.

But when exports are banned, and GOI unloads its stocks below its economic cost with a view to suppressing market prices, it practically amounts to “dumping” within India by GOI itself! And then, on top of this all, if it also imposes stocking limits on traders and millers, the net impact is an ‘implicit tax’ on farmers.

The approach reflects a strong "pro-consumer bias" in India's food price policy.'

The paper recommends a judicious use of trade policy to tackle inflation keeping farmers' interests in mind, without hampering their earnings. The paper recommends that "In the short-run, instead of protectionist trade

policy, it is important to calibrate trade policy efficiently to control rising inflation in the commodity."

It suggests that to cool down the prices, import duty on wheat and spices should be reduced and the import restrictions on the cheapest pulses should be reconsidered, the govt should build buffer stocks for volatile vegetables like tomatoes, onions and potatoes (TOP).

The paper recommends that, "In the medium term, the processing sector needs to be boosted. The promotion of the use of dehydrated onion, and tomato puree that can be viable substitutes for consumers during the period of price pressure on fresh produce will also help. To curb inflationary pressure on onion and tomato, at least 10 percent of fresh produce should be processed."

And in the long run, the paper recommends that the govt should increase investments in R & D, keeping climate change in mind, the govt should invest in innovative farming practices, drought-resisting seed varieties and irrigation coverage should be increased.

The paper states that, "To tame food inflation, we need to revamp the entire policy matrix in light of climate change, and boost reform in marketing and trade policies, moving away from outdated export restrictions and pro-consumer agriculture price policies, often at the cost of farmers."