Farm tariffs should not be tinkered with

G Chandrashekhar | Updated on January 09, 2018 Published on November 15, 2017

Not knowing the pulse: Tinkering too much - Photo: Kamal Narang

For the sake of international credibility and to avoid retaliatory action, India should stick to a liberal trade and tariff policy

New Delhi is at a complete loss on how to tackle the problem of low agri commodity prices. Intervention may take the form of trade policy and/or tariff changes in the sense that restrictions on export or import will be placed or customs tariffs will be raised or lowered to encourage/discourage trade.

The idea of price band and policy intervention is no panacea for rates falling below MSP recently. Such quick fixes seldom deliver sustained results. On the other hand, they can distort the trade, unleash speculative forces and not deliver intended relief to growers and consumers.

A fundamental issue with effecting frequent changes in export-import policy is that it ignores India’s role in the global marketplace. Despite the fact that India is a consuming economy and not an export-oriented one, farm exports are not insubstantial. Over the last three years they were worth ₹17-19 lakh crore(about $ 30 billion).

Major agri products shipped out of the country include rice, spices, cotton, coffee, oilseeds, oilmeals and castor oil, fresh vegetables, guargum meal and many more items. Marine products and meat too earn substantial foreign exchange. Major imports include vegetable oils, pulses, fresh fruits and vegetables, raw cashew as also wheat and sugar from time to time.

Nurturing the market

The market for export has been cultivated over long years, while the import of essentials such as edible oil and pulses is inevitable. Any tinkering with trade policy without taking into account international sensitivities and trade relations can potentially lead to a backlash and retaliatory action.

A progressive foreign trade policy is one where export and import windows both are open. The exim policy should be treated as sacrosanct and be tweaked only in rare cases. Handling tariff policy is tricky. It is not just the volume of export or import that drives commodity prices.

There are other drivers including global demand and supply, monetary policy, currency, weather and speculative funds in the bourses, apart from seasonal and regional production. Unfortunately within the Indian government there is little global commodity market commercial intelligence available so as to be able to take informed decisions on tariff changes. Bilateral pacts with various countries have to be honoured too.

It is reported that MSP will be treated as the benchmark. This dynamic tariff policy would work well on paper, but not on the ground. Exporters and importers make forward commitments and frequent changes in policies will lead to uncertainties and risk.

Since 2013, the world has had five straight years of large production of oilseeds resulting in a burdensome inventory. The Indian oilseeds and oils market is well integrated with the global market through the trade route. Any change in world market prices will get reflected here.

Oil and policy

Frequent changes in exim policy for oilseeds and oils would prove to be counter-productive because India is import-dependent for edible oil. That would make frequent tariff changes seem like a logical alternative. But they hardly exert a marked impact on domestic oilseed prices. A hike in customs duty on imported oils has had no effect on oilseed rates here.

In the case of vegetable oil, it is possible to restrict trade without imposing trade or tariff barriers. Primarily, imports need regulation in terms of registration of import contracts and monitoring of arrivals. Importantly, excessive import, if any, can be curbed by reducing the credit period for payment against imports.

A long credit period — 90 to 150 days — encourages over-trading and many importers are mired in what can be called the ‘import debt trap’. Imposing a maximum credit period of 30 days will remove the incentive to indulge in over-trading.

On the pulses front, the Government has no clue what hit them over the last one year. They are trying all kinds of tricks including trade and tariff changes to lift the price of domestic pulses. These are at best negative tactics that will deliver little benefit to growers. We need affirmative action in the form of strong procurement, and distribution of pulses (after milling) through the PDS

There is inertia within the Government to act, and every ministry concerned — agriculture, food and consumer affairs, finance, to name a few — is keen to find an easier way out of the mess. Clearly, the Government’s response to the developments in the pulses sector in the last one year has failed. The approach needs a thorough review. We have to look at the sector holistically covering production, processing, consumption and trade.

The writer is a commodities market specialist

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Published on November 15, 2017
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