In our last post, we discussed the reasons behind India’s rapidly declining agricultural trade surplus. While agricultural exports have fallen, imports have been rising at a worrisome rate. In this post we will examine some of the issues with India’s current import policies.
Absence of Effective Policy on Self-Sufficiency in Oilseeds
Domestic agricultural policies have not effectively addressed India’s need for self-sufficiency in oilseeds, which form a major part of India’s agricultural imports. The sowing area for oilseeds, a majority of which is rain fed, has remained almost stagnant for the last ten years. Though the average yield of various oilseeds has improved, the yield is still lower than the world average and significantly lower than other major oilseeds producing nations. Moreover, phased reduction of import duties on edible oils to near zero made way for cheaper imports.
Lack of Domestic Policy Support Leading to Cobweb Effect
Pulses and oilseeds do not receive the same support from domestic procurement policies as food grains. The absence of an effective procurement policy leaves farmers open to the risk of market price movements. Sowing decisions of farmers depend on the previous year’s market prices. This method creates a cobweb effect – bumper production in one year leads to market prices crashing, which in turn lead to lower cultivation the following year.
Inconsistency in sowing makes it necessary for the government to keep the doors open for import agreements and fulfill its import obligations with other countries, even in the years of bumper production. This leads to a further glut of pulses and oilseeds in the market.
Non-Flexibility of Trade Policies
In times of excess production, continued free imports lead to a fall in farmer incomes. A case in point, mentioned in last month’s post on exports, is the financial loss to pulse farmers in FY 2017. These losses were in part due to export restrictions on pulses, but also because free imports of cheaper pulses flooded the market and further pushed down domestic prices. The government imposed an import quota in August 2017, but this came too late and was of little help to farmers.
India’s WTO bound tariff levels are much higher than the applied rates, especially for many agricultural products. These gaps (binding overhang) allow the government to modify tariff rates in response to domestic and international market conditions. But they also reduce tariff predictability. Trade economists often argue that a country’s large binding overhang makes its trade policies less predictable and renders it an unreliable trading partner.
Stringent Trade Restrictions Delaying Free Trade Agreements (FTAs)
Developed nations have accused India of closing its agricultural market to foreign commodities. Their unmet demand of opening up a larger share of domestic agricultural markets has delayed various FTA negotiations. Only recently, Australia declared that one of the major reasons behind the delay in successful talks for the long pending FTA is India’s protectionist bent towards agricultural products.
Tariff Policy Countercyclical
A recent ICRIER and World Bank study observed that India’s tariff policy is countercyclical across commodities and across time for same commodities. A case in point is edible oil, a major import item in agricultural trade, for which the study observed that import duties moved negatively with its global prices. This negative movement is indicated by an increase in duties when global prices fall and a reduction in duties when global prices rise.
India’s policymakers are re-visiting the country’s agricultural trade policies. In our next post, we will explore and propose sustainable import and export trade policy reforms that will benefit consumers and farmers.