The Hindu Business Line : Govt has to work out end-to-end solutions on pepper issue

FALLING pepper prices have been a cause of concern to growers and policymakers in Kerala for more than a year now. The common refrain has been that unfettered import from Sri Lanka has caused domestic prices to weaken.

There have also been demands from time to time to review the concessional duty regime.

It is a fact that, from an average of Rs 88 per kg in 2002-03, domestic prices declined to Rs 74/kg the following year and further down to about Rs 71/kg in the first six months of 2004-05. Prices averaged Rs 64/kg in October 2004.

Pepper arrivals from Sri Lanka have no doubt expanded. According to Commerce Ministry, from a level of 1,759 tonnes worth Rs 27.91 crore in 2000-01, pepper imports declined to 1,241 tonnes worth Rs 16.05 crore the following year. However, in 2002-03, such imports spurted to 6,099 tonnes valued at Rs 57.05 crore, but fell to 4,916 tonnes worth Rs 35.26 crore last fiscal.

Despite numerous representations and lobbying, the Centre is unconvinced, and perhaps rightly so, that imports from Sri Lanka have led to a price fall here. The Government has defended such imports by taking a stand that fall in domestic prices of pepper is reflective of international prices.

In addition, the Commerce Ministry has said it is the general policy of the Government to give a thrust to the export of value-added products for which imports are allowed duty-free for re-export purposes. Value-added items realise better prices in the international market, it has argued.

Now, the Kerala Government has expressed its intention to step in to stop prices from falling further by undertaking procurement. It is a commendable support measure by the State Government. Kerala Markfed is said to be awaiting approval to begin market intervention. (BL, December 8).

But there are several questions that remain unanswered. The pepper market has always been rather volatile. While consumption around the world has been growing steadily, supplies have seen large increases in recent years. In particular, Vietnam, a low cost producer, has become a dominant factor in the world pepper market and is able to influence prices.

In recent years, India did little to have a fitting response to emerging large supplies. Because of Indian pepper's export orientation and rampant speculation in the marketplace, pepper prices had remained strong artificially. The demand-supply fundamentals did not support such huge price spikes. Rampant speculation among traders rather than fundamentals had been driving prices up.

Therefore, price expectations have been artificially inflated. Studies have shown that the cost of production of pepper is between Rs 35 and Rs 40 per kg. Worse, the yields of Indian pepper are abysmally low. Investment in research and measures to raise yields and thereby, at least partially, neutralise the effect of a price fall have not delivered.

Obviously, the Government should do a serious rethink on the role of Spices Board. It has failed to effectively address structural issues confronting pepper growers in Kerala. What initiatives it has taken to build export competitiveness and how effective they have been is also unclear.

The trade associations, on their part, have played little constructive role in pepper business. Except for seeking trade related sops and shedding crocodile tears for pepper growers, there is no evidence of a plan to address structural issues with a long-term perspective.

A price fall should actually gladden exporters because that under normal circumstances would make Indian pepper more competitive in the export market. But the fact of the matter is, even at the current so-called low price level, there is very limited demand for Indian pepper.

Without imports for re-export purposes, India's export performance would look pathetic. The hollow claims made by some trade leaders about the premium nature of Indian pepper stand exposed. Overseas buyers are unwilling to pay fancy prices.

As pepper occupies a significant part of the spices basket, end-to-end solutions have to be worked out, instead of making ad hoc approaches to issues. Let the policymakers and trade representatives decide what is a `reasonable price' for pepper. Production costs, current yields, yield potential and investment required, domestic demand, export competitiveness and other related aspects have to be looked into.