Export bans are no solution – On the Government efforts to contain the rising retail food inflation | 24 July 2023 | UPSC Daily Editorial Analysis

What's the article about?

• It talks about the Government's efforts to contain the retail food inflation within legal limits.

Relevance:

• GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment;
• Prelims

Context:

• Retail food inflation (wheat, rice, tomatoes, pulses, milk, etc.), measured as Consumer Price Index (CPI) inflation print, at 4.8%, is continuously rising.
• Thus, in order to limit this rising food inflation, the Government employed measures such as an export ban.
• In this article, through various examples, we will analyse the efficacy of this export ban strategy to limit inflation.

Analysis:

• Example 1: Cereal Inflation
  • The government has imposed a ban on exports of white rice with a hope to tame cereal inflation. But the efficacy of this move is in question. For example, consider wheat:
  • India imposed a ban on wheat exports in May 2022, and, in June 2023, further tightened the grip on markets by imposing stocking limits on traders and processors. And yet, inflation in wheat hovers in double digits.
  • The reason? Policymakers are using instruments of the 1960s. Such bans on exports and strangulation of domestic markets will not be appreciated by G20 countries.
  • The rice export ban will hurt the African countries most as rice prices are likely to go up internationally. India is the largest exporter of rice, accounting for almost 40% of the global rice trade.
  • Domestically, it reflects a knee-jerk reaction and a strong pro-consumer bias, which, incidentally, turns out to be anti-farmer.
  • Better solution for taming wheat and rice (non-PDS) inflation:
    • Reduce the import duty on wheat from 40% to, say, 10%, and unload excess rice stocks in the open market at lower prices than what the Food Corporation of India (FCI) has been doing recently.
    • There is also a need to revise the weight of food and beverages in the CPI basket, which is outdated and based on the 2011 consumption survey.
    • This weight currently is 45.9%, and food alone is 39%. Engel’s law clearly shows us that with rising per capita income, people will spend less on food.
    • The research suggests that the weight of food and beverages will be around 38% in CPI basket in 2023, and that of food alone will be about 33%. With the old weights, we are over-estimating CPI inflation, which needs urgent correction.
• Example 2: Tomato inflation
  • Correcting the base effect:
    • The tomato prices that are bothering an average household currently, show a negative inflation of 34.7% in June 2023.
    • It is because last year, in June 2022, the inflation of tomatoes was 158%, and, therefore, when one compares year-on-year (y-o-y) inflation, it turns out to be negative for tomatoes.
    • But, on a month-on-month (m-o-m) basis, June-over-May 2023 inflation is 64.5% for tomatoes. July may be even higher before it cools down in August-September when fresh arrivals start coming from Maharashtra.
  • Efficacy of the Operation Green:
    • One must seek accountability from Operation Green, which was conceptualised to stabilise value chains and prices of tomatoes, onions, and potatoes (TOP).
    • The research shows that even as tomato prices will likely cool off in August-September, onion prices could rise.
    • There is no short term solution, but in the medium term, at least 10-15% of these need to be processed to stabilise their prices.
• Example 3: Milk & milk products
  • The milk & milk products recorded an inflation rate of 8.56% in June 2023 and contributed 11.2% to overall CPI inflation.
  • Interestingly, among the 299 commodities in the CPI basket, liquid milk has the highest contribution of 11% to CPI inflation. Rising feed costs and lumpy skin disease have led to near-stagnant milk production (222 mt) in FY23 over (221 mt) in FY22. The policy solution again lies in reducing import duties on skimmed milk powder (SMP) from 60% to 10% and on butter from 40% to 10%.
• Example 4: Pulses
  • Pulses and products inflation in June 2023 is at double digits (10.53%). And within this group, tur has to be watched.
  • It experienced a significant inflation rate (27.50% )due to lower acreage and production compared to the previous year.
  • Regions dependent on rainfall for pulses cultivation, such as Madhya Pradesh, Rajasthan, and Maharashtra, may see reduced output due to anticipated adverse weather conditions caused by El Nino.
  • Importing as much tur as possible from Mozambique, Malawi, Myanmar in time can help tame prices.
  • Also, India needs to abolish the minimum import price for yellow pea, which currently stands at Rs 200/kg. Yellow pea is the cheapest pulse and can act as an anchor on overall spurt in pulses prices.

Way Forward:

• To sum up, India can contain CPI inflation within 6%, provided it uses import policy for food products liberally and well in time.