The Hindu Business Line : Contradictions in foreign trade policy need to be explained

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Contradictions in foreign trade policy need to be explained

G. Chandrashekhar

Mumbai, March 16

Even within the framework of a liberalised foreign trade environment, one is left wondering whether there is any broad but definite logic to changes in the export/import policy. It is becoming increasingly difficult to fathom the rationale behind changes (or the lack of changes) in trade and tariff policies of the Government.

Agricultural commodities are a case in point.

Over the last one-year and more, the Government either banned or considerably restricted the export of a few commodities, opened up the import of some commodities, lowered the customs duty on some, and completely abolished the duty on some others.

Generally, whether a commodity is in short supply or in surplus determines the foreign trade policy. It is well recognised that if some commodity is in short supply, export is banned and/or import is encouraged. Tariffs play a role in regulating imports. Domestic output and prices as also international prices help decide the rate of customs duty.

New Delhi’s trade and tariff policies have internal contradictions galore. Export of wheat and most pulses stands prohibited.

Rice

In case of rice, a stiff minimum export price has been stipulated, effectively preventing overseas business. While import duty on pulses has been done away with, there has been a reduction in duty on imported vegetable oils. Import of wheat is allowed duty-free, same is the case for maize (corn).

However, within commodity groups and commodities inter se, there are aberrations as far as trade policy is concerned. The logic of decisions made is far from clear.

In case of sugar, we have a genuine surplus in the country. Production for 2007-08 is estimated at 26-28 million tonnes and consumption 5-6 mt lower.

The Government is doing everything to support the sugar sector and to promote exports including grant of subsidies.

In case of rice, the government says, production in 2007-08 has reached a record 94 mt. Despite the claim, export restrictions have been imposed on the commodity for the reason that internal prices have been rising.

Someone in the Government needs to answer the question why internal prices are firm despite record production; and what is the dire necessity to restrict exports.

The case of wheat is strange. For the second successive year, the Government estimates a bumper harvest. Output is seen reaching 75-76 mt as per the latest information coming out of Krishi Bhawan. However, wheat export is banned, while import is allowed duty-free.

Going by reports, the Government is scouting for imports.

This is despite the claim of record crop in the offing. Given the level of internal prices, India can potentially be a wheat exporter. As export is banned, Indian wheat growers cannot hope to obtain prices in line with international market trends. Also, notwithstanding the seemingly large crop, the Government faced little success in reaching the procurement target.

The latest is that buyers (whether corporates, firms or individuals) have to declare their stock holding to the Government. It is mandatory that anyone holding more than 10,000 tonnes will have to inform the Government. The quantum stands reduced from 50,000 tonnes of last year.

Maize production has been rising, so is the internal demand. Availability is tight and prices firm. But we have a situation where maize exports continue unrestricted and import is allowed duty-free. Lack of price parity due to exorbitant international prices ensures there is no import, while exports continue because of the same price differential.

Pulses have been in short supply for over two decades and the country heavily relies on imports - about 3 mt representing a fifth of domestic output. To meet the shortfall, imports are allowed duty-free. However, export is banned.

The oilseeds and oils complex presents a truly complex picture. Oilseeds output is said to have reached a new high of 27 mt. in 2007-08, 3 mt up from the previous year. Imports continue unabated. For 2007-08, the inflow is set to expand by 10 per cent to aggregate over 5 mt.

To control rising internal prices despite high output, the Government slashed the rate of customs duty on major oils like palm and soya. The current rate of basic duty on crude palm oil is 45 percent and on soya oil 40 per cent. Appreciation of the rupee has also helped lower the landed cost. With specified tariff values for various oils at artificially lower rates for nearly two years now, the real effective duty on major oils today is less than 20 per cent.

Edible Oilseeds

Soyabean production is estimated at a record of over 90 lakh tonnes; yet prices of bean and oil are record high. However, the precarious price and supply situation notwithstanding, edible oil export continues. Indian export houses are likely to ship out about one lakh tonnes of various oils. Groundnut oil is being exported on a sizeable scale.

Soyabean oil is the next in line. What common logic does one decipher from these contradictions? Clearly, the trade policy lacks consistency. If shortage and high internal prices are the reason for restricting exports (like in case of pulses and wheat), the same logic should apply to maize and edible oil too. They are in short supply, internal prices are high and imports are allowed either duty-free (maize) or at considerably lower rates (edible oil).

In the same vein, why restrict the export of commodities when their imports have been allowed duty-free or at considerably low rates.

The Government is duty bound to explain these contradictions in the foreign trade policy. Commodity market in general and foreign trade in particular is not something to be tinkered with.

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