Commodity Analysis

Time to rethink India’s rice policy

Prerna Sharma | Updated on January 17, 2018 Published on August 07, 2016



Govt’s production and distribution processes are out of sync with consumption patterns

Of late, with growing income and awareness about nutritious food, there has been a noticeable decrease in the consumption of rice (a high-carb food) in Indian households. This change in consumption pattern, however, is not reflected in India’s agriculture policy which continues to revolve around rice and wheat. Moreover, current policies related to production, procurement, storage and distribution of rice are creating a number of internal and external problems.

The Centre is promoting rice production through a combination of support prices, assured procurement and subsidies on key inputs like irrigation, chemical fertilisers and electricity — the major proportion of input subsidies is consumed by rice.

Thus, paddy’s MSP has risen from ₹580 per quintal in 2006-07 to ₹1,470 per quintal of 2016-17 at a CAGR of 10 per cent. Then, there are State-specific bonuses over and above the MSPs.

Domestically, the over-promotion of rice (and wheat) creates a mismatch between demand and supply. That leads to food inflation fuelled by price surges of specific commodities, such as pulses, oilseeds, fruits and vegetables. The ongoing pulses crisis (40 per cent production shortfall) is one of its ill-effects. Many a time, India struggles with inflation in rice despite surplus production and excess stocks with the government, which calls for a rethink on existing policy. Also, the current policy of promoting a water-intensive crop like paddy is aiding faster depletion of the water table, i.e. 17.7 cubic km/year in Punjab and Haryana.

Stocking and distribution

The FCI is carrying a rice stock of 19.4 million tonnes (MT) as on July 1, 2016, as against the buffer norm of 13.5 MT. Additional procurement to implement the National Food Security Act is further putting pressure on the existing inadequate storage infrastructure. Out of 81 MT of FCI’s grain storage capacity, only 50 MT is covered.

Overstocking inflates the government’s cost and lack of proper storage system leads to deterioration in rice quality. After procurement and stocks withheld by farmers, only one-third of the rice remains free for open market trade. Thus, the market gets nervous about any small cues.

India’s MSP-based procurement always faces global criticism that it distorts the price of the world market by exporting subsidised rice. India is the largest rice exporter, contributing 25 per cent to the global rice trade (42 MT) but, is considered an unreliable supplier due to its flip-flops on the trade policy front. Hardening of rice prices in 2007-08 prompted India to ban export of non-basmati rice (revoked in 2011) that caused international rice prices to soar.

This knee-jerk reaction from India prompted rice-importing countries to respond with policy measures (hikes in support prices and raising tariff/non-tariff barriers to check imports) to augment indigenous rice production. Indonesia and the Philippines fix rice import quota every year. Japan has banned rice imports except milled rice at an import tariff of 778 per cent. China doesn’t import rice from India. The world’s rice market is shallow, with only 8 per cent of the total produce being traded. So, any market-distorting action by major players leads to a dramatic change in prices and constrains India’s export. India exported 10.4 MT of rice worth $5.79 billion in FY2015-16, down 13 per cent (quantity) and 26 per cent (value) in FY2014-15.

The way forward

The shift in food consumption pattern calls for incentivising non-cereal crops. The government has increased MSP and declared bonus in pulses to boost production. But, these market distorting measures are not sustainable in the long term and will add to the subsidy burden.

There is a need to replace price-support measures with income-support ones, such as direct payment to farmers, and let market forces guide what to produce and how much. The government should focus on increasing public spending to improve irrigation and develop high-yielding varieties of seeds to raise productivity. This will increase farmers’ return in a sustainable way. A nutrient-based subsidy regime will promote a balanced use of fertilisers and improve per unit return on subsidies.

The writer is VP and Head, Agriculture, Food and Retail, at Biznomics Consulting.

Published on August 07, 2016

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