Balancing act in agriculture: Markets must be allowed to function

Recent policy changes like adjusting agri export prices and import duties will benefit producers. But consistent, well-thought interventions remain crucial for market development and price stability

The Union government last week took decisions related to the import and export of agricultural items. It removed the minimum export price (MEP) on Basmati rice. The government had last year imposed an MEP of $1,200 per tonne on Basmati rice, and that was later lowered to $950 per tonne. The government also reduced the minimum export duty on onions from 40 per cent to 20 per cent. On the other hand, it increased the import duty on edible oils from zero to 20 per cent. After adding other components, the effective duty would be 27.5 per cent. The basic Customs duty on refined oil was also increased to 32.5 per cent. The government expects this decision to increase demand for domestic sunflower, groundnut, and mustard refined oil.

These decisions will clearly benefit producers. In the case of rice, for instance, given that market prices have started coming down in anticipation of a good harvest supported by a good monsoon, it made little sense to continue with export restrictions. However, expectedly, the decision is also being viewed through the political lens. Campaigning for the Assembly elections is in full swing in Haryana, which is also a major producer of Basmati rice. There were demands for removing the MEP condition. The reduction in export duty on onions is being seen in the context of the upcoming Maharashtra Assembly elections. Maharashtra is a major producer of onions, and it is reasoned that the performance of the constituents of the ruling National Democratic Alliance suffered in the recent Lok Sabha elections partly due to the export restrictions. News reports suggest there is a shortage of onions in global markets, which could benefit Indian exporters.

Although the latest move will benefit producers in terms of opening up export opportunities and restricting import in the case of edible oil, the basic issue with India’s agricultural trade policy is that it is not always consistent and often sends conflicting signals. It is well understood that food prices are a sensitive issue, with an element of overall food security involved, but interventions should still be limited and well thought through. For instance, the rice export restriction should have been reviewed at the time of sowing. This would have helped farmers make better decisions. Further, it is well documented that often interventions in the agricultural sector are done with the consumer interest in mind. As the latest Economic Survey also pointed out, “…price stabilisation measures aimed at consumers often conflict with income support policies for the farmers”. Economist Ashok Gulati and others have also shown that Indian farmers are implicitly taxed through restrictive trade and marketing policies.

This was again reflected in a related government decision last week. The government lowered the limit on wheat stock traders can hold from 3,000 tonnes to 2,000 tonnes. The move clearly is to improve availability in the market and reduce prices. However, such moves, or the idea of stock limits, will discourage traders or millers from investing in capacity building, permanently impeding market development. This will, in turn, keep prices low at the time of harvest and act as a disincentive against increasing production. Thus, it is important for the government to minimise interventions and allow market forces to develop. This will help boost production, increase availability, and reduce price volatility over time.