The Hindu Business Line : Export curbs: A knee-jerk approach to stabilising the economy

The Government’s steps to control food and fuel prices may contain price pressures in the short term, but by heightening market distortions and subsidy pressures, they could hurt growth over the medium term, says G. SRINIVASAN.

An alternative to total ban on non-basmati rice export could be to prescribe quantitative ceilings and impose export duty.

With inflation heading into the uncomfortable 8 per cent range, the UPA Government is in an unenviable position, particularly in the run-up to a series of State Assembly elections this year, to be followed by the General Election in early 2009. The prospects of escalating prices of essential commodities, coupled with a distinct growth slowdown in the economy this fiscal, on the back of a general slowdown of the global economy, would definitely be unnerving for the Governme nt. It has to be on guard, lest any wrong move it makes in managing the economy should dent its electoral fortunes.

Considering the fact that the economy saw an annual average rate of growth in GDP in the last five years of above 7 per cent, as brought out by the Economic Survey 2007-08, and with the twin threats of a global slowdown and commodity price boom-stoked inflation due to a combination of short-term supply shortages and the high growth in economic activity in the emerging economies, the portents at this juncture appear none too encouraging.

The upsurge in prices and the distinct economic slowdown in the second year of the Eleventh Five-Year Plan have thus come at an inopportune moment for the governing coalition.

The series of fiscal measures the UPA government initiated include, besides the duty cut on edible oil and pulses, a ban on export of wheat and agricultural products such as non-basmati rice. Commerce Ministry numbers show that, other than basmati, rice exports during the first 11 months of fiscal 2007-08 (April to February) fetched the country Rs 6,073.02 crore, against Rs 3,668.44 crore in the corresponding period of 2006-07 — a robust growth of close to 66 per cent.

Food security

The ban on non-basmati rice exports was put into effect from April 1, 2008, prompted by the realisation that the country’s food security should not be put at risk. Thus the government has responded to sharply rising commodity prices by slapping price caps and export restrictions on food, fuel and such construction items as cement and steel that are in short supply.

Be that as it may, the latest report on India by rating agency Moody’s says that such measures might contain price pressures in the short term by preventing their pass-through to consumers. But, by heightening market distortions and fiscal subsidy pressures over the medium term, they could hurt future growth or inflation dynamics and contribute to the government’s large debt burden.

It is also interesting to note that the country’s annual supplement to the Foreign Trade Policy (FTP) announced on April 11 set the target of $200 billion for the current fiscal on the back of $155 billion achieved in 2007-08. According to Moody’s, the composition of merchandise exports is shifting away from textiles and primary products towards higher value-added areas such as engineering goods, auto components, chemicals and refined products — which enable a better defence of export production margins amidst a global slowdown.

Discriminatory

Even as India’s exports have diversified product-wise and destination-wise in recent years, there has been acceleration in exports of rice, tobacco, spices oil-meal and marine products. But exports of commercial crops such as tea, coffee and cotton have decelerated. The unusual growth in exports of rice (basmati and non-basmati), of close to 45 per cent between April 2007 and February 2008, in the wake of commodity-price induced inflation, has set the authorities thinking in terms of slapping an export duty on basmati rice, coupled with a minimum export price (MEP), both amounting to $1,200 per tonne, while completely banning the export of non-basmati rice.

Within the non-basmati rice, premium varieties such as ponni and sona masuri and matta, mostly exported from Kerala, Karnataka, Tamil Nadu and Andhra Pradesh today stand banned and the representatives of the trade have gone on record protesting the discriminatory approach of the Government in singling out their rice varieties for the ban.

They say that the share of contribution of non-basmati rice to the Food Corporation of India (FCI), even by rice-growing Northern States such as Punjab, Haryana, Uttar Pradesh and Uttarakhand, had declined in recent years.

This is because the basmati millers have diverted the non-basmati rice land to basmati paddy cultivation including that of a non-notified premium variety such as PUSA 1121 that enjoys lucrative markets all over the world, except Europe.

When such a non-notified premium variety such as PUSA 1121 is grown in larger volumes and on wider areas in non-basmati rice-growing Northern States, this exerts a considerable downtrend in non-basmati rice production and, hence, procurement.

Says Mr P. Vishnukumar, Secretary, South India Rice Exporters Association: “The government should examine seriously whether the 1.50 lakh tonnes of ponni rice exports affects the food security of the country or if it is the so-called larger volume of a non-notified premium variety such as PUSA 1121, exported as basmati rice”.

The trade-off

It is even suggested that instead of a total ban on non-basmati premium variety like ponni, the authorities could export this sort of rice from Southern ports by prescribing quantitative ceilings and imposing export duty as they have done in the case of basmati exports, which have a minimum export price, export duty and port restrictions.

This way, the exporters do not lose their entrenched overseas markets and the government earns revenue by export duty.

But given the domestic compulsions of keeping inflation under leash, the government is in no mood to relent its ban on non-basmati rice exports, which are low-priced varieties that could be sold for domestic consumption.

Even as one flank of the rice export industry is pleading for ending a discriminatory export ban, India’s rice export rival Pakistan has announced a series of MEPs for its basmati and non-basmati rice and is contemplating imposing a MEP for brown rice without imposing an export ban on any of the varieties of rice it sells abroad.

A populous country such as India has its own logic in framing its trade policy, particularly on sensitive products such as wheat and rice. When contacted, Mr T. Nanda Kumar, Secretary, Ministry of Consumer Affairs, Food and Public Distribution, told Business Line that at a time when global prices of food-grains are ruling high, “some hard decisions” are needed to provide respite to people reeling under inflation.

He said the ban on non-basmati rice would have affected the profits of exporters in the wake of the steep rise in rice prices globally but, otherwise, the people in the country would have to fork out global prices for these essential items.

This is the trade-off and the government has opted for shielding the domestic consumers from spiralling prices of food-grains.

As production and productivity gain momentum in the agricultural area, perhaps the policy-makers will refrain from placing a selective ban on exports that rob the credibility of the exporters, besides their earnings.