Farm and Food Policy: How Modi government has swung from pro-producer to pro-consumer in the last two years

Another indicator of how sticky food inflation has been during Modi 2.0 is its exceeding general retail inflation in 25 out of 52 months (there’s no data for the two lockdown months of April and May 2020). During Modi 1.0, CFPI inflation ruled above CPI inflation in only 20 out of 60 months (see chart). The year leading to the last Lok Sabha elections in April-May 2019 registered an average food inflation of just 0.2%, compared to 6.3% during the 12 months ending November 2023.

The policy response then…

Modi 1.0 and even the initial part of Modi 2.0 was a time of surpluses and low prices for most agricultural commodities. Record rice and wheat procurement at minimum support prices (MSP) resulted in their stocks in government godowns peaking at 109.5 million tonnes (mt) on July 1, 2021. Closing stocks of sugar with mills, too, touched an all-time high of 14.3 mt in the 2018-19 season (October-September).

These surpluses, amid the Covid-induced economic shock, led the Modi government to double the monthly allocation of foodgrains under the public distribution system to 10 kg per person during April 2020-December 2022, with the additional 5 kg being given free of cost.

To enable sugar mills to liquidate their excess stocks and clear the cane dues of farmers, an incentive of up to Rs 10,448 per tonne was given on exports. The country shipped out unprecedented quantities – 5.9 mt, 7.2 mt and 11 mt – during the 2019-20, 2020-21 and 2021-22 seasons.

Further, mills were incentivised to produce less sugar from their cane and more of ethanol for blending with petrol. This was done by forcing oil companies to pay more for ethanol made from direct sugarcane juice/syrup or intermediate stage (B-heavy) molasses, as against the final residual (C-heavy) molasses.

It wasn’t only cereals and sugar. The Modi government also raised import duties on pulses and edible oils to protect domestic growers suffering low realisations.

Prior to June 30, 2017, pulses imports attracted zero duty. On that date, a 10% import duty was levied on arhar (pigeon-pea) and masoor (red lentils). By 2017-end, there was a 30% duty on masoor and chana (chickpea), 50% on yellow/white peas, and annual import quantity restrictions (QR) of 0.2 mt on arhar and 0.3 mt on urad/moong (black/green gram). In February-March 2018, the import duty was hiked to 40% for kabuli (large) chana and 60% for desi (small-sized) chana. In April 2018, yellow/white pea imports were subjected to an annual QR of 0.1 mt, followed by a minimum price of Rs 200/kg below which no consignment would be cleared in December 2019.

In edible oils, the basic customs duty was increased from 12.5% to 35% on imported crude soyabean and sunflower oil, and from 7.5% to 44% on crude palm oil, between September 2016 and June 2018. The duties for even their refined oils went up from 20% to 45% and 15% to 54% respectively.

The culmination of this period of surpluses was the Modi government’s enactment of its three farm reform laws in June 2020. The laws freed the trade in agricultural produce. Private agri-businesses could bypass government-regulated markets and buy directly from farmers, with no barriers to movement or limits to how much produce they could purchase and stock. The large-scale entry of organised private players was expected to also ease the government’s burden, at least with regard to undertaking fiscally unsustainable MSP procurement operations.

…and now

The resurgence of food inflation, especially post Russia’s invasion of Ukraine in February 2022, completely transformed the picture. The shoe was now on the other foot, with the Modi government compelled to privilege the interests of consumers over producers.

Starting from around November 2020, the customs duty on crude palm, soyabean and sunflower oil was reduced in stages to nil. The same on their refined oils, too, was slashed to 12.5%. Even after adding a 5% agriculture cess and 10% social welfare surcharge on that, the effective duty is just 5.5% on crude oils and 13.75% on refined oils (which are exempted from the cess).

In pulses, the QRs on imports of arhar and urad were lifted on May 15, 2021. Their imports, and also of masoor, have been made duty-free as well. The Modi government, late last month, announced that the free imports of these pulses would continue till March 31, 2025. Earlier in the month, yellow/white peas imports were exempted from QR along with the 50% duty and Rs 200/kg minimum price condition. Currently, import of only moong is under QR and that of chana is leviable to 40-60% duty.

There has been no liberalisation of imports in rice, wheat and sugar so far, one reason being their growers carry more political voice. However, the Modi government has banned exports of wheat and sugar since May 2022 and May 2023 respectively. In rice, only basmati and parboiled non-basmati shipments are being permitted, subject to a $950/tonne minimum export price stipulation and 20% duty respectively.

More recently, sugar mills have been allowed to use cane juice/syrup and B-molasses for making ethanol only to the extent that 1.7 mt of sugar gets diverted during the current 2023-24 season, down from 4.5 mt in 2022-23. Clearly, the government’s priority today is to ensure that more cane goes for food (sugar) than for fuel (ethanol).

The road ahead

The changed supply situation from “surplus” to “tight” – public warehouses had only 62.8 mt of rice and wheat as on December 1, 2023, while sugar mills ended the 2022-23 season with six-year-low stocks of 5.7 mt – has meant that the Modi government’s farm laws are dead both in letter (they were repealed in November 2021) and in spirit.

The last two years or more have seen export bans/curbs not just on wheat, rice and sugar, but even onion and de-oiled rice bran used as a cattle and poultry feed ingredient. Stock limits – the quantity of produce that traders, processors or retailers can hold – have been clamped on wheat, arhar and urad, contrary to the provisions in the now-repealed Essential Commodities (Amendment) Act.

With the latest annual retail food inflation number for November 2023 at 8.7%, while even higher at 10.3% for cereals and 20.2% for pulses, the above restrictions are likely to remain, if not intensify, at least till the Lok Sabha polls scheduled in April-May 2024. No ruling party would want dal-roti to be foremost in the average voter’s mind when it matters.