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Opinion: The message from the government’s wheat export ban

Madan Sabnavis writes: It is not prepared to let market forces operate in the agricultural sector.

Written by Madan Sabnavis |
Updated: May 25, 2022 9:04:43 pm
The MSP and procurement system needs to be dismantled. (Illustration by C R Sasikumar)

The ban on the export of wheat was not unexpected. It is a part of the DNA of governments to get nervous when prices go up in the market even though nothing is seen amiss in increasing the minimum support price every year. The rather ambivalent approach to agriculture comes out clearly with this move.

The broader question is whether we are prepared to let the market function in agriculture. The answer is – no. We are not comfortable with market forces operating. Nor are we quite sure whether we want the farmer to get a better price or the consumer to pay less. This happened with the farm laws, which were progressive but the government backtracked. Let us try and understand how this ban has come about.

Governments spend a lot of money in the form of subsidies to ensure farmers are enthused to produce more wheat. The Centre keeps increasing the MSP for this purpose and states often pay a bonus for procurement. There are political reasons too as the farmer lobby needs to be placated. We have been taking credit for the production of wheat and every year we set a new record. This year, the Ministry announced that wheat production will touch a record of 111 million tonnes, which has recently been revised downwards going by the 3rd Advance Estimates.

With the war, conditions have changed. Russia and Ukraine are large producers of wheat and their supply to world markets has been cut off due to sanctions and supply chain disruptions. With supplies interrupted, there is an opportunity for other surplus nations to step in. But the disruption has caused world prices to rise significantly. The World Bank data indicates that the price of US (soft red winter) wheat has gone up from $328/tonne in December to $672/tonne while US (hard red winter) wheat is up from $377 to $496/tonne. What does this mean? Countries that produce abundant wheat now have a chance to leverage this opportunity to export. This is what has been happening with farmers diverting wheat to the export market. As per some estimates, upwards of 10 million tonnes are being diverted.

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But wasn’t the wheat output supposed to be at a new high? It does appear that production will be lower than expected. The government has also not been able to procure wheat as farmers are no longer selling at MSP (which is at Rs 2,015/quintal) as they are getting higher prices in mandis where traders are buying and selling in the overseas markets. But, shouldn’t everyone be happy as the whole edifice of agriculture policy has been to give farmers higher prices?

Now it is argued that stocks are low and it is getting hard to replenish them. As of May 10, procurement was just 18 million tonnes against 43 million tonnes last year. This is a significant fall. But stocks with the Centre and other state agencies are 30.3 million tonnes, way above the buffer norms of 27.6 million tonnes. But there is panic as the government’s free food programme involves giving wheat and rice to the poor. While this has now been reduced to just rice, the ban on wheat exports is because of this.

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As an afterthought, the government has allowed all consignments handed over to the customs as on the date of ban to be exported. This ensures that contracts that had reached the last stage are honoured. There is also some pressure from other nations to relax this ban. Thus, it is possible that there could be some more allowances. But the knee-jerk reaction is more bothersome.

One may recollect that in 2007 and again in 2021, the government banned futures trading in wheat on grounds that it led to speculative pressure on prices even though the quantity traded and the open interest were minuscule. At that time, it was a decline in expected output which triggered this action. Therefore, it is not surprising that exports have been banned as there is some reluctance in letting the market decide.

It does look like the wheat economy will continue to operate within two constraints that have become barriers to commercialisation. The first is MSP and government procurement, which feeds into the public distribution system. The second is the arhatiya system of trading where middlemen have come in the way of any reform. It is tough to break these shackles.

The MSP and procurement system needs to be dismantled. As the government has successfully expanded both the Aadhaar and Jan Dhan programmes, there should be simple cash transfers to beneficiaries. If the government is trying to get out of running enterprises through disinvestment, there is justification to move out of the system of procurement and distribution. Buffer stocks can be held to ease distress during a crisis, but government involvement should stop there. Procuring unlimited quantities of wheat and keeping huge stocks has distorted the wheat matrix.

The mandi system too needs to be revisited and alternatives have to be made available so that farmers can choose the point of sale. There is continuous talk of moving up the value chain in agriculture and commercialisation will help this cause.

We have been critical of Indonesia banning the export of palm oil (which has just been revoked). Our actions appear to be similar when it comes to wheat. We have been talking about being a part of global supply chains to augment value addition and accelerate growth. But when it comes to agriculture it is a blow-hot blow-cold approach. This not only affects our credibility but also sends confusing signals to producers as to what is the best way out for them.

This column first appeared in the print edition on May 25, 2022 under the title ‘Export ban, dismal message’. The writer is Chief Economist, Bank of Baroda and author of Lockdown or Economic Destruction. Views are personal

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