BY INVITATION. How long can India sustain ad hoc agri-trade policies? Stability is essential

Agri-exports constitute a significant share of India exports with foreign exchange earnings at $30 billion annually. There is potential to double this revenue in the next five years. At the same time, there are opportunities to contain the cost of agri-imports where India has a chronic deficit. A major obstacle to widening our trade volumes has been the uncertain and frequent oscillations in country’s agri-trade policy between restrictions and bans on one side and unfettered free trade on the other. Such oscillations have bred uncertainty and dented India’s image as a reliable trade partner in the international market.

The instruments used for effecting changes include import duties, minimum export prices, imposition/lifting of export bans, etc. This has led to instability in the investment policy framework in the agro-processing industry, misaligned Indian prices from international prices and led to cropping distortions. Such ad hoc -ism, which is the antithesis of creation of a competitive environment, is unsustainable and has caused a heavy burden on the country.

Distorted Minimum Support Prices (MSPs) that are much higher than international prices have further played their role in price divergence, which has inter alia stripped the country off its export competitiveness in a host of agri-commodities. Recently, US has alleged that India’s MSP for wheat and rice far exceeded its allowable levels of trade distorting domestic support as per WTO norms (which require the trade distorting support to be capped at 10 per cent of total output). Though India has refuted the claim, the role of MSPs in distorting Indian prices vis-à-vis global prices, can be no longer ignored.

For example, Russia, a major wheat exporter is offering wheat at a FOB (free-on-board) price of ₹1,350/qtl, while Indian wheat prices are hovering near the support price of ₹1,735/qtl. Similarly, despite a pile up of stocks of a pulse like tur, India is unable to export because of disparity. Myanmar is offering Tur at a FOB price ₹2,500/qtl, while Indian Tur prices are ruling ₹3,800/qtl with MSP fixed much higher at ₹5,450/qtl.

India’s WTO bound tariff levels are much higher than the applied rates for many agricultural products, like wheat, edible oils and sugar, implicitly taxing the consumers in the process who need never be subsidised. Due to India’s protectionist policy stance on different occasions, developed nations have often delayed Free Trade Agreement (FTA) negotiations with it.

On the other hand, policies with a pro-consumer bias implicitly tax producers by placing export restrictions on different commodities. India’s restrictive trade policies have prevented exporters from taking advantage of available export opportunities. These policy biases have resulted in ad hoc, reactive policy making and frequent flip flops leading to adverse consequences in the medium to long run.

Pulses, which has recently seen a lot of action on the trade front clearly illustrates the inconsistent trade policy making. India signed a long-term MoU with Mozambique for pulses import in July 2016 when prices were on the rise. Barely a year later, India imposed Quantitative Restrictions on import of pulses which inflicted huge losses on small holders who cultivated pulses solely for meeting Indian demand. More recently, the import duty on Chana was hiked from 30 per cent to 40 per cent & from 40 per cent to 60 per cent in a span of less than a month. However, this along with lifting the decade long export ban and export incentive failed to revive the pulses export due to the long period of the ban which has led to loss of overseas market for India.

And, despite all the measures, prices of various pulses continue to rule well below MSP!

Similarly, in the case of sugar, 20 per cent import duty slapped in June 2016 to check rising prices was scrapped less than a year later in March 2018, a minimum indicative export quota of 2 million tonnes was mandated and further the cane farmers were subsidised to help mills clear arrears. Despite all these measures, Indian sugar prices are reeling under pressure and yet India has not been able to export as global prices are lower. International sugar futures are trading at around ₹2,120/qtl against the Indian prices of around ₹2,670/qtl. The import duty on wheat has also been subject to frequent policy changes.

A predictive and stable policy regime is the need of the hour. The government needs to phase out biases from its agri-trade policy making and acknowledge the fact that global prices will eventually be transmitted into the domestic boundaries! Trade restrictions may defer the process, but domestic and global price will converge in the long run, and India has to be ready to face this challenge.

The writer is MD & CEO, National Collateral Management Services Limited (NCML). Views are personal.