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Export bans won’t cure inflation

A 5-10% export tax on rice could help recover some of the farm-subsidies

This is surely not the first time that such an attempt is being made, to ban exports of wheat and rice. It was also done in 2007-08 in the wake of the global financial crisis.
This is surely not the first time that such an attempt is being made, to ban exports of wheat and rice. It was also done in 2007-08 in the wake of the global financial crisis.

By Ashok Gulati & Ritika Juneja

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There are media reports suggesting that the government is mulling over banning exports of rice to tame inflation. On May 13, the government had banned wheat exports to check potential rise in prices in the face of low procurement of wheat. This is surely not the first time that such an attempt is being made, to ban exports of wheat and rice. It was also done in 2007-08 in the wake of the global financial crisis.

By doing so again, some people in the government think that they can tame inflation in India. Maybe they will also impose stocking limits on traders for a horde of commodities, suspend futures trading in food items, and even go for income tax raids on traders of food. But all such extreme measures in the name of taming inflation only expose the hollowness and lack of understanding within the government as to how market economies function and what is really behind high inflation.

Let us take the case of rice first. India exported its highest-ever volume of rice—21 million metric tons (mmt)—in FY22, in a global market of about 51.3 mmt; the exported volume amounts to about 41% of the global exports. In an earlier article (bit.ly/3OwYsKW), we had argued that such large volumes of rice exports brought down global prices of rice (Thailand, 25% broken) by about 23% in March (year-on-year), when all other cereal prices, be it wheat or maize, were going up substantially in the global market (by 44% and 27%, respectively).

Our rough calculations suggest that if India exports more than about 25% of the global trade in rice, it starts to have a dampening effect on global prices. In fact, in FY22, the unit value of exports of common rice was just $354/tonne, which was below even the minimum support price (MSP) of rice. This meant that rice exporters were either buying rice (paddy) from farmers and millers at below MSP, or that quite a substantial part of rice being given free under the PM Garib Kalyan Ann Yojana (PMGKAY) was being siphoned away for exports at prices below MSP.

When “excessive exports” bring down global prices, what it means is that to earn the same dollar, India will have to export more quantity of rice. This is a perfect case for “optimal export tax”, not ban, on exports of rice. We would argue here for imposition of, say, 5-10% export tax on rice exports with a view to also recover large input subsidies that India gives for rice cultivation. Free electricity for irrigation in several states, most notably Punjab, and highly subsidised fertilisers, especially urea, create artificial competitive advantage for Indian rice in global markets. While urea prices in global markets breached $900/tonne in April, Indian farmers pay roughly $72/tonne at existing exchange rates, which is perhaps the cheapest price that any farmer pays in the world. And the government subsidy on fertilisers will surely cross Rs 2 trillion in FY23.

If we can’t raise domestic prices of urea, which is long overdue, we should at least recover a part of urea subsidy from exports of rice by imposing an optimal export tax.

But will this help tame inflation at home? The answer is clearly ‘no’. In order to understand that, we must look at the contribution of different items in inflation. In May 2022, the consumer price index (CPI) inflation was 7.04% year-on-year. The cereals group, as a whole, contributed only 6.6% of this inflation. Within that, rice and wheat through public distribution system (PDS) contributed zero, and wheat atta (other than PDS), contributed just 3.11% and non-PDS rice contributed 1.59%.

So, by imposing ban on exports of wheat and rice, it is impossible for India to tame its inflation as more than 95% of CPI inflation is being contributed by other items. Interestingly, inflation in vegetables contributed 14.4% to CPI inflation, which is more than three times the contribution of rice and wheat combined. And within vegetables, tomato alone contributed 7.01% to CPI inflation. Will the government now ban tomato exports?

What all this indicates is that agri-trade policies need to be more stable and predictable, rather than a result of knee-jerk reactions. In commodities like vegetables, most of which are largely perishable, we need to build efficient value-chains and link these to processing facilities.

So, when the prices of fresh vegetables spike, as it happened in case of tomatoes in May, people can switch to its processed form (tomato puree) whose prices are more stable.

The same would go for onions, which often brings tears to households when its prices shoot up. A switch to dehydrated onion flakes and onion powder would be an answer. Our food processing industry, especially in perishable products, in way behind the curve compared to several South East Asian nations. This needs to be taken up on high priority.

Export bans on food items also shows somewhat irresponsible behaviour at the global level unless there is some major calamity in the country concerned. India is in a fortunate situation for food—it is largely self-reliant, except in the case of edible oils, where it imports 55-60% of its consumption. Think about how did India feel when Indonesia had put a ban on exports of its palm oil.

The recently-concluded WTO ministerial meeting, as well as the G-7 meeting, expressed concerns about food security of vulnerable nations. Abrupt export bans inflict high costs on poorer nations, and many millions fall below the poverty line as a result of such actions by a few.

If India wants to be a globally responsible player, it should avoid sudden and abrupt bans, and if need be, filter it through transparent export taxes to recover its large subsidies on power and fertilisers.

The authors are, respectively, Infosys Chair professor for agriculture, and research fellow, ICRIER.

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