FE Editorial Rice to acid

The Financial Express
Posted: Jul 07, 2008 at 2109 hrs IST
Updated: Jul 07, 2008 at 2109 hrs IST

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Inflation seen at 12.13 pct on Sept 20Inflation unchanged at 12.14 pcInflation in double digit till Jan: SenInflation coming under control: PM's aide

Export bans are clearly the policy choice of the moment. Every time inflation numbers go up, the government has another fiat ready. In the last few months, exports of rice, wheat, edible oils, cement and more recently maize have been prohibited or restricted. More bans are planned. There are demands for bans on export of cotton, rubber, oilmeal, and even inputs for the fertiliser industry like sulphuric and phosphoric acid. The logic that exports of any commodity or item that is seen as fuelling inflation should be stopped to increase local supplies. is flawed. Simple as it sounds, this kind of policy can lead to all sorts of distortions. For one, supply may fall if producers get less remunerative prices in the local market compared with what they were getting from exports. Ultimately, this can exacerbate inflation. Fiscal measures like export duty on basmati rice and administrative steps like suspending futures trading in rice, wheat, edible oils, rubber and potato make the export ban worse when seen in a cumulative market distorting context.

The deeper problem lies in the hasty and haphazard manner in which these administrative measures are being implemented. All kinds of interest groups which are facing pressure on their revenues and profits due to the rising prices are demanding a ban on exports of goods of interest to them. A case in point is that of poultry traders—-not satisfied with the temporary halt on maize exports, the poultry industry is now calling for a ban on exports of oilmeal, a vital component of feedmeal. Needless to say, what is good for the poultry industry may not be good for other industries, and is certainly not good for farmers, who are bound to be an important electoral constituency. The timing of all these export bans also points towards a pattern—export of rice, edible oils and maize were banned just ahead of their sowing. From the evidence available so far, the farming community has not given much credence to these steps and has gone ahead with its sowing in the kharif season. The government would be strongly advised not to ban any more exports—prices will not fall and producers of the banned commodities, particularly farmers, will respond adversely at the ballot box. The political economy of the country, narrow vested interests aside, is weighted against bans.