Commodities

Why the minimum export price is irrelevant?

| Updated on: Jan 23, 2018
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The Commerce Ministry is reportedly working on a policy for promoting export of agriculture commodities; and is keen to do away with restrictions such as minimum export price (MEP) for most of the export goods, barring what it calls ‘sensitive’ items.

Fixing a floor price

It is strange that the Udyog Bhawan mandarins continue to cling to utterly outdated export restrictions such as MEP. The floor price is more often than not imposed on commodities such as onion, basmati rice and others with the vain hope that export volumes will be restricted, domestic price rise will be contained and more foreign exchange will be earned.

From time to time, the government stipulates a minimum price below which an exporter shall not sell the product to an overseas customer. The export invoice has to be at or above the specified MEP. The intention is to ensure that Indian goods are not ‘thrown away’ at low prices in the international market.

It is well-known that the price restriction can be easily circumvented by ingenious exporters by pricing the export product at market rate, but invoiced at or a little over MEP for record purpose.

Over the years, exporters have routinely managed to beat the MEP rule. Depending on the relationship between Indian sellers and overseas buyers, the difference in price is often settled through future transactions or quality claims and so on.

Imposed by the Commerce Ministry, the MEP is hardly an effective instrument to restrict commodity export or contain domestic price rise; and therefore, deserves to be done away with. So, what’s the alternative?

Export duty

Imposing an export duty is an effective alternative. A fiscal levy is a sure way to augment revenue for the exchequer; and there is no escape and no discretion.

But it is the Finance Ministry, and not the Commerce Ministry, that will take the decision to impose or vary the rate of duty. The Finance Ministry will have to take into account any sensitivities relating to export of essential and politically touchy commodities such as onion. Also, it has to be on top of market developments so that it is able to take proactive decisions.

Farm export policy

Importantly, for promoting export of agri-commodities, the country should produce ‘genuine export surplus’. Barring a limited number of commodities such as basmati rice and cotton, there are not many commodities that are in real surplus for the overseas market.

Agri export has often been a play on currency; a weaker rupee helps boost exports.

The Commerce Ministry’s new agri-export push should not be a standalone, ministry-centric policy that merely tinkers with certain procedural aspects.

Agri export promotion must be designed and seen as an all encompassing policy that provides holistic solutions from farm to ship. Only then will the policy enjoy sustained success.

Also, it is time to review the various external trade agreements. In the past, some of these were pushed through in a hurry without adequate stakeholder consultation. Imports under free trade agreements continue to hurt domestic producers. It is time to tighten them, while working to make domestic products more competitive.

The writer is a global agri-business and commodities market specialist. Views are personal.

Published on January 23, 2018

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