A rapidly declining trade surplus, vast increase in imports, and falling exports have defined India’s agricultural trade for the past three years. Newly appointed Minister of Commerce, Suresh Prabhu, recently cited his ministry’s intentions to address this problem with a new policy framework that promotes agricultural exports. In this first of a three-part series, we will review and analyse India’s current agricultural trade policy, specifically for exports, to better understand possible measures that can take the country forward.
Background on Policy Influencers
India’s agriculture policy is heavily influenced by the overarching goal of food security. Once domestic needs for consumption and stocking are met, the residual determines the broad direction of agricultural trade policies for three main reasons. First, India has had bitter experiences with famines and food imports in the past. Second, shortage of foreign exchange until 1991 restricted India’s ability to import food. Finally, there is policymakers’ sensitivity to consumer sentiments regarding food prices.
Agricultural Trade Performance
According to the WTO, India is the top tenth exporter of agricultural products in the world. India is one of the top exporters of sugar, beef, rice, and shrimp. Export of principal agricultural products including rice, wheat, sugar, cotton, fruits and vegetables are “free” (i.e. no quantitative restrictions). Export of pulses (excluding chickpea) and edible vegetable oil in bulk (excluding coconut and rice bran oils) are “restricted” to meet domestic demand.
Since the economy opened up in 1991, India’s agricultural trade surplus reported more than ten-fold increase between 1991-92 and 2013-14. The brisk pace at which exports increased offset the corresponding increase in imports. However, in the last three years agricultural exports fell by 22% while imports increased by 62%. India’s trade surplus saw a significant decline of 70% (see figure below).
Figure 1: Agri-Trade Performance (source – CMIE Economic Outlook)
Despite being second in global agricultural production, India’s share of world agricultural exports is as low as 2%. Agricultural exports’ contribution to India’s GDP is only 2%, lower than other developing agrarian countries as seen in the figure below. Also, while these countries are listed in top 10 exporters of the world, they do not make up the top 10 importers list, whereas India ranks seventh on that list.
Figure 2: Comparison of Some of Top Agricultural Exporters’ Contribution to Domestic GDP
Restrictive Policies and Biases
An ICRIER and World Bank study found that between 2004-14, India’s restrictive trade policies prevented exporters from taking advantage of available export opportunities. A case in point is the 2007-08 global food crisis. When rising global prices made many Indian products export competitive, rice and wheat exporters were prevented from fully exploiting this trade opportunity. This was due to the fear that global price trends would seep into domestic markets thus hurting domestic consumers.
Inflexible Trade Policies
Continued restriction on exports during times of excess production leads to a fall in farmer incomes. Another case in point – in 2016-17, despite record production of pulses (especially tur and moong), farmers saw profit margins fall by almost16% on an average. By contrast, gram – exports of which are permitted and which made up 40-45% of total pulse production and 60% of pulse exports – proved profitable, as the international market was ready to absorb the excess supply.
Domestic Policies versus Global Demand
MSP’s artificial support of high domestic prices is a disincentive to exporters. MSP’s encouragement of cereal production in place of commercial and horticulture crops affects India’s ability to capture export markets. India’s farmers also ignore global demand signals and focus instead on cultivating locally consumed commodities.
Unreliable Trade Partner
India’s agricultural trade policies are inconsistent with respect to guaranteed availability of produce for exports. Quantities for export generally depend on each year’s domestic price and production scenario.
Overstocking – a Waste of Export Potential
The Food Corporation of India’s (FCI) overstocking of food grains locks in a substantial quantity that can be available for export (see figure below). Moreover, recent studies have criticised the Public Distribution System (PDS) for grain leakage, wastage, and inclusion and exclusion errors.
Figure 3: FCI’s Overstocking of Food Grains
India has come a long way from the days of acute food shortages and famines. Research has shown that inefficiencies of systems, not lower agricultural production, are a major reason behind the country’s high incidence of malnutrition. Food security and domestic price sensitivity as drivers of agricultural trade policies have become increasingly irrelevant. Restrictive trade policies do not insulate domestic prices from global price trends.
In our next post, we will examine the rising, and worrisome, rate of agricultural imports and the drawbacks of current import policies.